stimulus check

What You Should Do With Your Stimulus Check

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Many Americans have started to receive their stimulus check which is part of the federal government’s relief package due to the coronavirus. Direct deposits began showing up in eligible American’s bank accounts around April 11th.

The $1,200 per adult and $500 per child is meant to help people and households through the financial pressure that the COVID-19 pandemic has caused. It is also meant to help stimulate and encourage consumer spending.

What you use your stimulus check on is largely determined by your unique financial situation. If you lost your job, have had your work hours reduced, or lost the income coming from a side job, then the money is probably best spent on addressing your present financial needs. But if you are still working and receiving your regular income, it could be used to help with other goals like investing. Let’s dive in and discuss more on the stimulus check and some ways that you can utilize it for your situation.

Who is Eligible For the Stimulus?

Eligibility for the stimulus check is dependent on what is reported on your tax filing as your annual income.  The government is using your tax filing from 2019 if you have already filed it. If not, they are using your 2018 information.  Here is how it breaks down:

Eligible for the $1,200 stimulus: 

  • Single tax filer – Made $75,000 or less
  • Married and jointly file – $150,000 or less
  • Head of household filer – $112,500 or less

Each family will also receive an additional $500 for each child who’s 17 and younger.

Now if you make more than these thresholds you can still receive a reduced stimulus. Every extra $100 of income made is a $5 reduction in the amount of the stimulus check. However, if you make more than $99,000, are married and jointly filed earning over $198,000, or earned $136,500 as head of the household, you don’t qualify.

There’s still the possibility of still qualifying for the $500 payment for every child. The reduction of $5 for every $100 that you earn above the $99,000/$198,000/$136,000 limits. Those people who are claimed as dependent on another’s tax return or are non-citizens who don’t have a green card don’t qualify.

If you don’t file tax returns but receive Social Security benefits, you may still be eligible for the stimulus check. Your information that’s found on your Social Security Benefit Statement is used instead to calculate the amount that you will receive.

An important note about these income limits is that they are based on your adjusted gross income (AGI). You can determine your AGI by taking your gross income (all the income you receive in a year including your wages, interest on financial accounts, and other sources of personal revenue) and subtracting it from adjustments that you qualify for. An example of an adjustment is your health savings account contributions.

How Does the Stimulus Check Work?

The stimulus check was passed by the federal government as part of the CARES Act. The total stimulus package totals $2 trillion dollars, making it the largest emergency relief bill in the history of the U.S. Technically speaking, it’s an advance tax credit that will offset your federal income taxes in 2020.

That being said, it does not affect your tax returns. You are still eligible to receive your full tax refund this year and next.

How the stimulus check works as a tax credit is that it dollar for dollar, reduces your tax bill. Tax credits aren’t normally claimed until filing your taxes. Due to the huge economic burden that the coronavirus pandemic has caused, the government is qualifying taxpayers early with a cash payment.

Tax credits are usually calculating as one of the last steps in determining your tax liability of a year. It doesn’t matter whether you itemize your deductions or not. The stimulus check’s tax credit is refundable which basically means even if you don’t have enough tax liability to offset it, you still get it.

You can think of the stimulus check like having a gift card at your favorite retail store. When you checkout with your items, it’s applied to your bill, reducing what you owe.

Do You Have to Pay Taxes on it?

You’re probably wondering since the government is using your tax filing information to determine how much of, if any, stimulus you are getting back will end up paying taxes on it. The answer is none.

It’s also not a form of “advance” on your tax refunds in the future. The stimulus check is truly extra money that you can take to the bank.

When Should You Receive Your Stimulus Check?

There’s nothing you need to do to receive your stimulus check. If you have direct deposit, you may have already seen your stimulus money show up in your bank account. The week of the 13th is when the IRS started sending many of the payments. For those who have filed their taxes using their bank account information, it’s being sent via direct deposit.

Otherwise, if the IRS doesn’t have your bank account information they are mailing a check. This method will take longer to receive. Using the IRS’s online tool, you can also check the status of your payment.

If you don’t have a direct deposit set up with the IRS or you’re not sure if you do, you can also use the above IRS tool link to set that up. Simply use the following steps:

  1. Click the Get My Payment link
  2. Click OK on the next page
  3. Enter your Social Security/individual tax ID, date of birth, street address, and zip code in the fields
  4. The status of your payment will appear if the IRS has your direct deposit information. If not, there’s a field that you can enter your bank account routing and account number

Many people have reported getting an error message when using this tool. The IRS is aware of the issue. There are several reasons that you might be getting a “Payment Status Not Available” message.

What You Should Do With Your Stimulus Check

How you use your stimulus check is largely determined by how you’ve been affected by the coronavirus pandemic. Even if you’re lucky enough to be in a financially  healthy place, you should use at least some of the money to “line your mattress” for the future.

As the past few months have taught us, you simply never know what the future may hold. But you at least use this opportunity to prepare for it.

Pay Your Bills/Rent

If the coronavirus has caused you or your family to lose income due to a lost job or reduction in hours, your stimulus check should be used to cover your basics. Remember, this is a one-time payment so decide what bill that you have an immediate need to cover.

If you haven’t already done so, contact your financial institution if you believe that you will struggle to pay back a credit card, mortgage, or other loans. See if there’s something that they can do to help you while you get back on your feet.

Contact your landlord if you’ve lost your job and discuss a different payment plan if you need a break as soon as possible. If you’ve been a good tenant up to this point and are being proactive in letting them know you’re facing problems, they are likely to be willing to work with you.

Your stimulus check can serve as a “temporary emergency fund” during this time. Hopefully, you have unemployment benefits that will be available for a longer period of time to help with your essential spending.

Use your stimulus to cover your rent or mortgage since those are your immediate needs. If you are able to pay for your housing, then look at your bills next. Some bills to consider using your stimulus check to help pay for include:

  • Utilities
  • Minimum payments on credit card balances or other debts
  • Insurance premiums for home or auto

During this time, you should try to avoid taking on more debt. Consider what alternatives you might have available to you. Use your stimulus money to pay for necessities such as groceries instead of putting it on a credit card.

Start an Emergency Fund or Add to an Existing One

Now is a great time to start hoarding away cash. Even though you may still have your job during this time, there’s no guarantee of what will happen in the future.

If you haven’t started an emergency fund, the stimulus check can be used for this purpose. An emergency fund is a rainy day account that covers three to six month’s worth of expenses. The intention is to use the money for essentials such as mortgage/rent, utilities, etc.

The average mortgage payment according to the U.S. Census Bureau is $1500 which is almost equal to the cost of renting which averages in at $1,476. That means a solid emergency saving to cover housing costs will likely have between $4,500 to $9,000.

Other costs that should be designated in the fund include the following:

  • Gas for vehicles – $120 to $200 per month
  • Groceries (family of four) – $400 per month
  • Utilities – $200 to $400 per month
  • Car repairs/tires – $1,000
  • Health care – cover the annual limit on out-of-pocket health care expenses

$1,200 is a great initial investment into an emergency fund. An emergency fund must be accessible quickly to be effective. Tying them into investment funds or CDs wouldn’t be the right approach. Find high-interest savings account to start your emergency fund. That way you’re still earning some money on the balance and it’s there whenever you might need to tap into it.

When you already have an emergency fund, the stimulus check could add on to the existing account. It could fund the costs mentioned above for a month and strengthen your financial position in the future if an unexpected emergency arises.

Invest it

The stock market has been a roller coaster over the past several weeks. Investors have felt uneasy and some have panicked, pulling their investments out. Those actions actually go against what you should do in these cases.

The hotel, airline, restaurant, and retail sectors have taken a hit with the economic downturn that’s being caused by the coronavirus pandemic. Shares have dropped significantly which means that they are currently on “sale”. For an investor with a long-term investing strategy, this is the ideal time to start purchasing up company shares that are experiencing record low prices.

Your stimulus check could be used to help take advantage of this buying period. Take this time to purchase shares of companies that are likely to bounce back and may have been performing strongly before the pandemic started. As is the case with investing, do some research on the company to decide whether you believe their price will rise in the future or the chances of yielding dividends.

Put it in Your Savings or a Sinking Fund

Another option is to use the stimulus check into a general savings account that can be used later on if you need to access it for purchases later on. A sinking fund is similar to a savings account except that it’s used for a more specific goal.

For example, you could set up a sinking fund for a new car that you’re saving up for next year or a vacation to Europe. Sinking funds have a more intentional purpose than lumping it into a savings account.

It’s called a sinking fund because you save money each month for a set of amount of time before you begin to spend it. If you have a goal, for example, to spend $1,000 on an anniversary present in August of this year, you may start putting $250 towards that beginning in May. A stimulus check could cover all this sinking fund in this case.

Pay off Your Debt

Paying off your existing debt can make a lot of sense to use your stimulus check on helping you do. It can save you a lot of money that you’re paying on interest. Reducing your debt may also help improve your credit score.

When deciding on what debt you should pay off, start with your credit cards or loans that have interest rates above 10 percent. Then look at the debt that you have with interest rates that are less than 10 percent.

You might consider paying off your student loan debt in these cases. Federal student loans are currently under forbearance until September. Any payments that you make during this time will go towards your principal, lowering your principal, and in turn reducing the amount of interest that you will pay over the long run.

Final Word

As long as you meet the income requirements, you should be eligible for a stimulus check. Its a cash rebate on a tax credit that you don’t have to pay back or affect your future tax returns. The stimulus check should be used in a way that makes sense for you. If you are in the unfortunate situation where you have lost all or some of your income due to the coronavirus, use it to pay for necessities. Otherwise use towards a meaningful financial goal such as paying off debt, putting into a savings/sinking fun, towards an emergency fund, or investing it. 

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