How retirees can qualify for the 1st coronavirus stimulus check

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The second coronavirus checks are still in limbo as lawmakers have failed to reach a consensus. It would have disappointed many who were left out (or got less money) from the first stimulus package and were hoping to be included this time. One such group is retirees with income more than $75,000. However, some retirees may still qualify for the first coronavirus stimulus check if they act smartly.

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Issue that retirees are facing

Income of most retirees comes from investment accounts and Social Security benefits. In 2020, the maximum Social Security benefit provided $45,480 in annual income. This means the likely reason some retirees exceeded the income limit for the stimulus checks was because of investment income.

For retirees, it is mandatory to take out money from investment accounts to meet the required minimum distribution (RMD) rules. RMDs count as taxable income. However, the CARES Act suspended RMDs for 2020. Moreover, those who withdrew any RMDs before the CARES act was passed were allowed to put it back.

This means that retirees can choose not to withdraw their RMD to qualify for the stimulus checks. However, there could be circumstances when retires can’t meet their expenses without contributions from RMDs. But, doing this could make such retirees ineligible for a coronavirus stimulus check.

There are a few ways (discussed in the second part) that can help such retirees meet their expenses, as well as qualify for the stimulus checks.

Many retirees may have a question of why their RMDs in 2020 would make them eligible for the coronavirus stimulus check that was passed in March. The question is valid considering the IRS is using 2018 or 2019 taxes to determine the stimulus checks eligibility.

The first stimulus checks were designed as an advance on new tax credits for 2020. So, if you were not eligible for this credit based on your past years tax return, you can still claim it when you file your 2020 return.

How might retirees qualify for coronavirus stimulus check?

Use Roth Accounts – unlike the RMDs, withdrawals from Roth accounts do not count as taxable income. So, if you have funds in a Roth IRA or a Roth 401(k), you should try to withdraw from these accounts as it would allow you to meet expenses without increasing your 2020 taxable income.

Use Health Savings Account Reimbursements – retirees may also consider using funds from their Health Savings Account (HSA) so that their taxable income does not increase. Similar to a Roth account, HSA funds can be withdrawn tax free, provided funds are used for qualified medical expenses.

One more way is not to aim for a full $1,200 stimulus check, but for a partial amount. The CARES Act offers a full check of $1,200 to those with annual income less than $75,000. Those with income above $75,000 but below $99,000 qualify for a partial stimulus payment. So, if retirees can’t live without withdrawing from RMD, then they should aim for an RMD amount that still qualifies them for at least a partial stimulus check.

Some retirees can still qualify for first coronavirus stimulus checks

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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.

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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.

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.