In the Coen brothers classic, “O Brother Where Art Thou?”, Pete Hogwallop, with crazed eyes of manic intensity, leaned forward to whisper/shout across a darkened movie theater. With lunatic conviction he uttered his resolute warning:
“DO… NOT… SEEK… THE TRAY-SURE!”
I’m a financial planner, so I get to talk with a whole bunch of families about their financial lives. A few weeks ago, I noticed that more and more of my clients were hitting me up and saying “Mark, what should we do with the extra stimulus money that Joe Biden is about to start sending me?”. Mind you, my clients are, with only two exceptions, very smart people (ay-o!). This tells me that there might be a larger bunch of folks out yonder who think they’re about to start getting extra money from the government.
Here’s a secret hint, just for insiders to our little clubhouse here… the government doesn’t have any money. That means their options are:
- Take money from income-earning citizens, then maybe give a tiny slice of that money back to those wage-earning citizens (as well as non-wage-earning citizens), who’re so used to ponying up huge chunks of dough to the government in the form of taxes that they might be duped into thinking that the government has somehow done them a generous favor, or
- Print more money! This would accomplish two things. Not only would you get the feeling of government generosity referenced above, but you would also accelerate inflation, since more money out in the world, without increased value behind that money, makes all money less valuable.
- But that’s another article.
Still, thanks to a lifetime of acculturation, we do tend to get excited when the government starts writing checks with our names on them, thinking we’re about to be given new, “extra money”.
Sigh.
People who think this way could be in for a serious shock come April 2022 when they have to file their taxes and realize that this “extra money” was really just an advance on a tax credit that they’ve been getting every year since they started having children.
Those people will find they’ve been handed their own money under the guise of it being a gift. Those people will realize that there was no gift given. Those people will be sad and disappointed, and discount beer will have a surge in sales. Those people will feel pathetic.
Today I’m here to help you not feel pathetic, and not be one of Those People.
DO. NOT. SEEK. THE. TRAY-SURE.
On July 15, 2021, many Americans really are going to start receiving checks from the U.S. government (I know, I know… you’re VERY used to this by now. Paying you to be enthusiastic about whatever controls are being foisted down your throats is becoming de rigueur around these parts. But these checks, mis amigos, will be a tad different).
Now, we’ve said it many times before, but we’ll repeat it. Even with the above cynicism firmly in place (that ain’t going nowhere; we understand too much about economics to ever be excited about our drowning-in-debt government writing more checks)… when the government is handing out money, you should just say “yes, please”… even if you have philosophical differences with the idea of such handouts.
These handouts are sometimes branded as “stimulus money”… usually that means that the government recognizes that its citizens are in a bad way (usually because of something the government did: war, economic recession, depression… or just stopping the business of the whole nation for a couple of years) and wants to get the economy going.
“Stimulus money”, just to be sure you know what that is, is usually in the “printed up out of thin air” category. It doesn’t come at a (direct) cost to you, and nobody will be expecting you to pay it back. It dilutes the money supply, sure, but inasmuch as “everybody gets some” money can be considered “free”… it is free. No strings attached.
An “advance of tax credits” can be called whatever you want to call it… but it’s not free money, not like stimulus money is. The government has long encouraged families to have children by giving them tax credits for each supported child in a home. Hopefully that rings a bell. Well the checks soon coming your way are simply an advance on that tax credit.
“But,” you may well ask, “a tax credit simply means I pay less taxes…”
Correct.
“But…” you stammer, “if it just means I pay less… why would they then give me that credit, as if it’s money. It’s not, money, right? It’s just a deduction.”
That’s right, and you display good common sense by asking.
“But…” you continue, “Spending a deduction just seems… stupid. It’s like when people buy stuff they don’t need and were never going to buy until it went on SALE!, so that they end up with LESS in their pocket, not more…”
Bro, I am right with you. You are making lots of sense. SPENDING a DEDUCTION (or, tax credit) miiiiiight be foolhardy. And yet! Them checks is gonna come into your mailbox. It’s gonna happen. (And when it does… it won’t be “stimulus money”.)
“So… how much will I get, anyway? Will it be… you know… a lot?”
You greedy lout, you! I know, you want to know. Well… the exact amount depends on the size of the tax credit you’re owed:
- For people making less than $150,000 per year, your total child tax credit will be $3,000 per child between the age of 6 and 17 as of December 31, 2021.
- For any kids under age 6 on that date, you’ll get $3,600.
- If you have kids who are 27 and playing XboX in your basement, you’ll receive exactly what you’re providing for them in life skills, PLUS what they contribute to the family’s bottom line on a weekly basis (zilch-o).
On July 15, you’ll get the first of 6 checks from the government that will, altogether, total half of this amount. The other half will be applied to your taxes as a refundable credit next year.
When I say this isn’t a new stimulus, you could argue that I was bending things a bit.
In truth, the amount has increased this year from last year’s tax credit of $2,000 per child. But my point is very important: unlike the stimulus checks you received in 2020, this is an advance payment on a tax credit, which is very different from a “stimulus check”.
In years past, if you did what we’ve recommended and optimized your taxes to get very close to a zero tax return or liability, and you have a couple of kids, that means that you likely got $4k worth of child tax credit that went towards your tax bill. Now, the credit has been raised by $1k per kid, but they are sending half of it to you in the form of checks during the year. Everything else being equal, you’ll receive $3k in checks between now and December, but you’ll get $1k less in a tax credit come tax time. So if you go and spend that $3k on a disappointing mystery box, you’ll be $1k short come tax time. Kapish?
I’m warning you. With crazy eyes. (If you’re a link-skipper, you really need to click this one that we keep referring back to every 500 words or so. Just trust me on this.)
Now what if you make more than $150k?
Alright moneybags, hold onto your bronzed baby shoes. All hope is not lost for you! You, too, have a shot at receiving some money that you will eventually have to give back (in part) to the government!
- For people making more than $150k per year, this extra credit is phased out at the rate of 5 cents for every dollar above the $150k level.
- So if your adjusted gross income for 2021 comes to $150,001, you’ll only get a $5,999.95 tax credit for your 9-year-old twins. Sorry.
- That also shakes out to mean that if you make $190,000 or more and have two 9 year olds, you don’t get any of the extra credit – you’re back to the previous amount of $4,000, and you’ll be getting half of that in checks between July and December and the other half in credit when you file your taxes.
Here’s The Calculator!
This can get confusing, so if you’d like to punch in your numbers, head over to this calculator and figure out what your own situation will look like in light of these new laws.
My hunch (and it’s just a hunch… I don’t know all of you guys and your personal tax forecasting habits) is that this new situation might be most tricky for families who have phased out of the extra money, but receive half of their usual credit ahead of time. Because these families are often in the high-earning years of a career, they might make more this year than last – and they might be the types likely to owe taxes instead of getting a refund. For them, if they have 4 kids, they now get $4k during the year in checks from the government. But if they remodel the bathroom with that $4k instead of saving it, they’ll be unpleasantly surprised when their normal $8k tax credit is down to $4k and they owe about $4k more than they expected.
The last gotcha to watch out for is this one:
Even the standard $2k-per-child credit phases out above $400k of income.
The present administration isn’t kidding when they say they’re going to stick it to the wealthy. You will be taxed higher, have fewer breaks, and will continue to be the straw man attacked with each new policy.
Still… If that’s you, congratulations. It’s worth pointing out here that building wealth is actually one of our Abrahamic goals, and if you’re doing that via high income (we do have some warnings for you, but) we salute you. And may the rest of our families cross that same threshold someday soon.
All of the above boring details are important to sort out for your unique situation, but the action items are applicable to us all. Here’s the review:
- If you have children under age 18, you’re very likely to get some kind of monthly checks from the government starting July 15.
- Some (or maybe all, depending on your income level) of that money was previously given to you in the form of a tax credit each year on your taxes. So this isn’t new, dreamt-up fantasy money.
- All else being equal, this means that you’ll have a bigger tax bill next year than you did this year – so don’t blow that money, bros. You might just need it to pay taxes!
- If you usually get a huge tax refund, then you have other issues to deal with, like fixing your withholdings so that you don’t give the government a free loan. But you “I always get a big tax refund!” types are less likely to get hit with a big tax bill due to this change. (You just won’t get as much back.)
- People who usually pay in very close to the amount of tax due during the year or who owe substantial taxes at filing are the ones for whom this change poses the greatest potential pitfall… so I’ll say it once again.
Don’t be duped into thinking that a check with your name on it is a gift. That kind of thinking will put you into a fright come April of next year. As we always say, the plans of the diligent lead surely to abundance and advantage, but everyone who acts in haste comes to poverty (that’s Proverbs 21:5). So don’t act like an impulsive 15-year-old when those checks start appearing. Be diligent, knowing that the government gives you interstates and libraries, but never free money.
You are now hereby deputized as Educated On The Difference Between a Stimulus Check and An Advance on Tax Credits. They ain’t the same, and now you know.
Don’t go buy dumb stuff with that money! Be a wise steward! Be diligent! Be Abrahamic!
*Mark Parrett is one of the founders of Abraham’s Wallet. When not blogging for you here, he’s raising a family in Salt Lake City, UT and working as a financial planner at Outpost Advisors.
