Well, the politicians are at it again. They are currently busy figuring out how to dole out the third round of stimulus — $1.9T this time. We should thank our unborn (great)grandchildren for their generosity.
It’s my understanding that the bill passed the House and is being debated in the Senate right now. The issue of “phase-out” rates is at the forefront of the Senate’s discussion.
I realize it’s not etched into law yet, but it seems to be getting closer by the day.
Here’s what I understand of the Senate’s version:
- $1,400/person (adult + child) stimulus
- The phase out is linear to zero over the phase-out region.
- Phase out regions:
- Single: $75k AGI begin phase-out. $80k AGI zero stimulus.
- Head of Household: $112k AGI begin phase-out. $120k AGI zero stimulus.
- Married filing jointly: $150k AGI begin phase-out. $160k AGI zero stimulus.
Here’s the relevant text from a Kiplinger article (link):
Under the bill, stimulus checks would not be reduced for single Americans earning up to $75,000, head-of-household filers making up to $112,500, and married couples with a combined income up to $150,000. As with previous stimulus checks, they would get a full payment. However, under the current Senate version of the bill, singles with an AGI above $75,000 would see their stimulus checks gradually phased-out until they reach zero for anyone making $80,000 or more ($100,000 under the House-passed bill). For head-of-household filers, the phaseout range would be from $112,500 to $120,000 ($112,500 to $150,000 under the House version). For married couples filing a joint return, the phase-out range would be $150,000 to $160,000 ($150,000 to $200,000 as passed by the House). Plus, the phase-out range’s ceiling would be a hard cap that applies to all people, regardless of how many dependents they have. As a result, third stimulus checks under the current Senate version would be reduced to zero for all taxpayers at or above the $80,000, $120,000, and $160,000 AGI levels (depending on your filing status).
Here’s how the above would work in my family’s scenario. You can verify here: https://my.kiplinger.com/kiplinger-tools/taxes/third-stimulus-check-calculator/index.php.
Married filing jointly w/ 5 kids = $9,800 stimulus pre-phase out (=$1400*7).
- $150k of AGI in 2020: $9,800 stimulus.
- $151k of AGI in 2020: $8,820 stimulus.
- $152k of AGI in 2020: $7,840 stimulus.
- $153k of AGI in 2020: $6,860 stimulus.
- $154k of AGI in 2020: $5,880 stimulus.
- $155k of AGI in 2020: $4,900 stimulus.
- $156k of AGI in 2020: $3,920 stimulus.
- $157k of AGI in 2020: $2,940 stimulus.
- $158k of AGI in 2020: $1,960 stimulus.
- $159k of AGI in 2020: $980 stimulus.
- $160k of AGI in 2020: $0 stimulus.
The implied marginal tax rate on income in this region would be 98% from the phase-out of the stimulus alone for my family. That doesn’t include federal (22%) + state (7%). When you account for those as well, the total marginal tax rate on income in the $150k-$160k range would be 127%.
In other words, a family with 5 kids with an AGI of $150k will have $2.7k more net income than a family with an AGI of $160k after appropriately accounting for stimulus R3 + federal + state income taxes.
I have a colleague with more than twice as many kids as me. This makes for some interesting discussions when we have guests on campus. It’s the first time in my life I’ve found myself uttering the works “I only have 5 kids.” His implied marginal tax rate under this policy would be in excess of 200% (from $150k to $160k AGI)!
If you think about it, you can easily compute the implied marginal tax rates for any given family size. Assume MFJ with the $10k phase-out region. All of the implied marginal rates computed below are from the stimulus alone and ignore federal + state taxes. In the case of MFJ, each additional child increases the MTR by 14% (=$1.4k/$10k).
- 0 kids: $2.8k max stimulus => 28% implied marginal tax rate.
- 1 kids: $4.2k max stimulus => 42% implied marginal tax rate.
- 2 kids: $5.6k max stimulus => 56% implied marginal tax rate.
- 3 kids: $7k max stimulus => 70% implied marginal tax rate.
- 4 kids: $8.4k max stimulus => 84% implied marginal tax rate.
- 5 kids: $9.8k max stimulus => 98% implied marginal tax rate.
- 6 kids: $11.2k max stimulus => 112% implied marginal tax rate.
- etc
That’s some pretty wonky economics. Any time marginal tax rates approach/exceed 100%, it means that something bad has happened policy-wise.
Conclusion
Bad economic policy frustrates me. >=100% marginal tax rates is bad economic policy.
If you find yourself in the relevant phase-out region, perhaps the most actionable thing I can think of is the following. If you are MFJ and your 2019 AGI was <= $150k and your 2020 AGI is > $150k (especially >$160k), then you would be incentivized to delay filing your 2020 taxes until the third (or fourth or fifth) stimulus is distributed. File an extension until October. This is what David OchoSinCoche is doing has considered doing (link).
More broadly, the trend of increasingly progressive tax policies (e.g. taxing higher incomes at higher rates) is here to stay. A sensible strategy would seem to be to save a lot of money, work less, and spend as much time on the receiving end of progressive tax policies as possible (e.g. the 0% tax rate on LTCG, EITC, ACA subsidies, etc.)
With the changes, I’m slightly on the fence about the extension. Under the Senate rules I won’t get a penny. And I doubt that they’re going to raise the cap between now and October. Frankly, I’m not too upset about it, given that I still have a job and my salary increased in 2020 from 2019. That said, I do agree that ending up with a marginal rate that exceeds 100% is bad policy
I agree there are worse problems in the world than >100% marginal tax rates. I mostly just find them to be a fascinating case study in bad incentives.
I just think it’d be a shame for a MFJ household with $150k 2019 AGI and $160k 2020 AGI to throw away $1.4k/person in “free” money by not filing their 2020 taxes a month or two later. If nothing else, perhaps this post might help someone realize that fact.
I agree entirely that the stimulus ought to be phased out for higher incomes. However, I think a more gradual (5%, 10%, 15%, 20%, 25%?) phase-out starting at $50k of income would be a much more sensible policy. Having the effective phase-out percentage increase with family size seems an odd policy choice (e.g. 14%/person for MFJ).
What wonky incentives. I should get laid off from my job, minimize my taxable capital gains and dividends, live off my sizable cash hoard and collect government benefits including unemployment, stimulus and ACA while paying zero income tax. Early retirement is looking much more attractive.
Don’t forget Medicaid + food stamps + section 8 housing: http://gregmankiw.blogspot.com/2009/11/poverty-trap.html
Stimulus aside, marginal tax rates easily exceed 100% for low-moderate income households.
Can mulit-millionaires get in on those gravy trains? I know how to qualify for the other stuff I mentioned.
With Medicaid expansion there is no longer an asset test. Just have income < 138% FPL. Asset tests for food stamps are state-dependent. For many, it's simply income based. If I ran the world, it'd be different.
Most states eliminated asset tests because it was cheaper to give benefits to a few “unworthy” but low income folks than dig around and find out most broke people are broke.
I’ve heard the same thing. Income is substantially easier to verify than assets. Consequently, I think having a large amount of assets + low income is a pretty lucrative strategy.
I’m kind of thinking of delaying filing taxes too. I’m single and in 2019 my income was about $70k in 2020 I saw my income rise to $150k. I’ve been getting stimulus money because of the lower 2019 income.
Welcome to the world of wonky incentives. A $1.4k reward for filing your taxes a couple of months later by requesting a tax extension!
Thinking of next year’s taxes, how will the extra 1k per kid change incentives? I might want more income this, 2021, tax year depending on the refundability of the updated child credit.
I am a bit unclear on how the extra $1k/kid CTC will work out. One article I read today implied that the phase-out might be really abrupt. If so, perhaps I’ll personally face MTR in excess of 200%.
With this round of stimulus, we get $0. The two previous rounds we were limited due to phase outs. However, our income is “high” only due to Roth conversions–not actually income, Just moving $$ around, but we are penalized. We can’t be the only ones negatively affected, but haven’t seen the issue raised anywhere……
What irks me the most is the changing of the rules mid-stream. Had you known the rules ahead of time, presumably you would have converted less Trad=>Roth last year.
If you google “senate stimulus phase-out” you’ll see quite a few articles about it. There was one in the WSJ today, but I don’t think it was really explicit about the exact nature of the new phase out. The devil is in the details, of course. Only a careful reading will reveal the dysfunctional underlying economics.
Thanks for the post FP! This was something I have been contemplating as well. My wife and I fall exactly into the weird category of realizing a large marginal benefit from delaying our tax filing (2019 AGI ~$148K, 2020 AGI ~200K).
To make things even weirder, we will receive a $3K federal refund on our 2020 taxes. We elected to delay filing in February betting on our eligibility for another stimulus check. Looks like it was the right decision, but now it creates an even stranger question at the margin: should we file and realize the benefit of the tax refund or file an extension to increase our chances of eligibility for additional stimulus?
Filing the extension doesn’t necessary preclude filing taxes prior to the October 15th deadline so it seems like a free option. The optimal choice may be to obtain the extension and then file as soon as it appears the probability of an additional stimulus check is sufficiently small.
Tony,
It’s a no brainer. File the extension and get the $3k refund + $2.8k of stimulus in October. You don’t lose your refund simply because you are filing later.
If you want the $3k refund sooner, then file as soon as the $2.8k stimulus is in hand.
– FP
I’m not going to turn away stimulus money, but it’s kind of ridiculous that we’re getting $1.4k/person when we’ve experienced zero economic hardship. At least some local charities will benefit. Personally, what I find as poor economic policy is that the stimulus is tied to AGI and not explicitly to a loss of income due to COVID. On the whole I would expect that those most affected by the pandemic would have lower AGI’s in 2020 compared to 2019. So, on average the bill should be finding its target. I don’t have pity for people potentially missing out on their stimulus handout because their income increased and/or the rules changed.
I agree with you about the silliness of the stimulus for those that haven’t lost their jobs. In that regard, it would have been much more appropriate to direct all dollars towards unemployment benefits.
The trick, of course, is to not make it more lucrative for people to stay at home than to find a job. It’s my understanding that many of the Covid unemployment policies violated this rule. That is bad policy.
In any regard, I think the current policy is simply an interesting case study in bad policy & incentives. It looks to me that policy makers aren’t particularly good at making policies.
Last summer there were too many college kids in my town that were collecting the enhanced unemployment instead of working. By simply saying that their job was affected, they were able to take the summer off and receive (can’t use the word “make”) more money than if they had worked. I told my working daughter that you’re better off working!
I agree with putting money into the lowest income brackets, but would prefer it to be more targeted to those that really suffered hardship. I’m a believer in the high velocity of money in these brackets — but would prefer more wisely constructed rules.
Agreed entirely!
EITC increased investment income limit to $10,000 could enable some wash gain sales or higher stock investments during early retirement. This is great for families especially since the phaseout for those without children is still pretty low.
This is fantastic news! I hadn’t heard about it before. Thanks for sharing!!!!!
Was this new 10,000 limit on investment income passed or is it just proposed? If passed, could you please provide a link as I couldn’t find it. Thank!
https://www.nytimes.com/live/2021/03/06/business/stimulus-check-plan-details#what-is-happening-with-the-earned-income-tax-credit
Taxpayers won’t be disqualified for the credit in 2021 until they have investment income of $10,000, up from $3,650. This change will be permanent, with the $10,000 threshold indexed to inflation.