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.
That’s some pretty wonky economics. Any time marginal tax rates approach/exceed 100%, it means that something bad has happened policy-wise.
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.)