The CARES Act offered stimulus checks of $1,200 to those making less than $75,000 as single tax filers (smaller payment if the income was between $75,000 and $99,000). However, some retirees were not eligible for the coronavirus stimulus checks because their income was too high. Those retirees, however, can still qualify for the stimulus money.
Retirees can qualify for coronavirus stimulus checks
The two major income sources for most retires are Social Security benefits and investment accounts. In 2020, the maximum benefit that Social Security would provide is $45,480 in annual income, notes a report from Motley Fool. This means the retirees who didn’t qualify for the stimulus checks had a bigger investment income.
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The primary reason for a high investment income is the required minimum distribution (RMD) rule. This rule requires withdrawal of a minimum amount from tax-saving accounts such as 401(k), IRA, 403(b) after you reach a certain age (70 ½, if born prior to July 1, 1949 or 72, if born after July 1, 1949).
Such a facility is because, as per the IRS website, “You cannot keep retirement funds in your account indefinitely.”
These RMDs are part of your taxable income. For some retirees, it could prove a significant portion of their yearly taxable income. So, these RMDs played a critical role in determining your eligibility for the stimulus checks.
There is, however, good news for the retirees who did not qualify for coronavirus stimulus checks due to high RMDs. For the year 2020, the CARES Act suspended the RMDs. This means that retirees can forgo withdrawing funds from IRAs or 401(k)s in 2020.
For those who have already withdrawn funds (RMDs) this year, the IRS allows you to put it back until August 31, 2020. Both – suspending and allowing retirees to return RMDs – means the retirees have more control over their taxable income this year. They can now use this opportunity to make themselves eligible for the stimulus checks.
How can retirees meet the income cap?
Let us consider an example to understand how retirees can still qualify for coronavirus stimulus checks. Suppose a retiree has an AGI (adjusted gross income) of $105,000 in 2019. This disqualifies him from a full stimulus check as the income cap is at $75,000. However, of the retiree's total AGI, $40,000 was because of RMDs (required minimum distributions) in 2019.
Now for 2020, the retiree can forgo taking RMDs. This could bring his income to about $65,000. Or, if he needs RMDs, then he could take only a portion of RMDs so that his AGI is still less than the $75,000 income cap. In both cases, retirees will qualify for full coronavirus stimulus checks of $1,200.
You may be wondering why your 2020 tax return would help you get the stimulus check that was based on taxpayers' 2018 or 2019 taxes. This is because the stimulus checks (under the CARES Act) were an advance on a new tax credit for 2020. So, if you didn’t get the stimulus check when the IRS was sending it, you can claim it as a tax credit when you file your 2020 returns.