In calculating future stimulus checks, Congress should look to 2020 tax returns

Congress has just approved sending out lots of $600 checks to people who don’t need them and, in rushing to get another round of checks out the door, is missing a far better opportunity to target this relief in a more meaningful way by just waiting a few more weeks. 

The latest round of stimulus checks, like the first round, is tied to 2019 taxable income (individuals earning under $75,000, or $150,000 for married couples, received the full amount, which phased out as taxable income increased). This was a quick and simple way to immediately get payments out and made sense back in April 2019 when most Americans had filed or were finalizing their 2019 tax returns and no one knew what the rest of 2020 had in store. 

Six months later when we are mere days away from the close of 2020, it seems absurd to still be looking back to 2019 taxable income as any indicator of need for future relief. The result is an approach that is both over-inclusive (sending checks to those who were not financially affected by the pandemic) and under-inclusive (failing to increase payments for those most financially impacted).

Although many Americans won’t file their 2020 tax returns until at least February or March 2021, using 2020 taxable income in calculating a third round of payments could provide a much more equitable allocation of funds to those who need it most.

Specifically, the next round of stimulus payments should look to 2020 tax returns. For example, consider the following three married couples in which each spouse earned $60,000 in 2019, resulting in total 2019 taxable income of $120,000 on their joint tax return. 

  • Couple 1: Both spouses kept their jobs and their taxable income in 2020 was equal to or higher than in 2019.
  • Couple 2: Spouse A kept her job while Spouse B lost his job but was eligible to collect unemployment benefits (which appear in taxable income) and the couple’s 2020 earnings only decreased by $10,000 from 2019 to 2020.
  • Couple 3: Spouse A kept her job, but Spouse B lost his job or had to stay home to care for children starting in March 2020 and was not eligible to collect unemployment benefits. Their taxable income has dropped from $120,000 in 2019 to somewhere around $70,000 in 2020 ($60,000 for the fully employed spouse and $10,000 for the spouse who became unemployed in March).

Both the first and second round of stimulus checks will direct the full payment to each of these three couples (assuming all have the same number of dependent children) even though Couple 1 is actually doing better now than in 2019, Couple 2 is doing okay thanks to the success of increased and extended unemployment benefits (which Congress should continue), and Couple 3 is likely struggling after experiencing a nearly 60 percent decrease in annual income during 2020. 

If we want to easily direct financial help to those most affected by the pandemic, we should compare taxable income in 2019 to taxable income in 2020 and direct stimulus payments to those who actually saw meaningful decline in their annual earnings during 2020. This is an administratively simple way to quickly identify those who suffered the biggest financial setbacks during 2020 and are likely most in need of additional financial stimulus. 

In the examples above, by not sending a check to Couple 1, we can redirect that money to give higher payments to Couple 3 and others who faced the most dramatic financial setbacks during 2020. It also takes into account the degree to which individuals have already been helped by other programs, such as increased unemployment benefits (e.g., Couple 2).

Future stimulus checks could be paid as a percentage of the difference between 2019 and 2020 income. For example, Congress could approve a third round of payment equal to 20 percent of the “lost” earnings from 2019 to 2020. In that situation, Couple 3 went from $120,000 to $70,000, or a “loss” of $50,000 and could receive a check equal to 20 percent of that amount, or $10,000 — which is going to go much farther in making Couple 3 “whole” again. While this method would not completely solve the under- and over-inclusivity problem, it would certainly be a more accurate method than simply basing future stimulus payments on 2019 or 2020 taxable income alone.

Additionally, Congress should consider either doubling or significantly increasing both the Child Tax Credit (which offers up to $2,000 per qualifying dependent child 16 or younger at the end of the calendar year) and the Earned Income Tax Credit (which provides substantial support to low- and moderate-income workers and families). Parents of young children have been hit especially hard by the pandemic. School closures have forced some parents to either quit their jobs or take extended leaves of absence to stay home with children who would otherwise be in school. Others have already incurred significant expenses hiring private tutors and caregivers, purchasing laptops for remote learning, and may still have future costs ahead to help students who “fell behind” during remote learning or need counseling to overcome mental and emotional trauma associated with the pandemic. Additionally, those in the lowest income brackets have also been hit especially hard by the pandemic and often have the least means to handle unforeseen costs. Doubling both of these tax credits for 2020 would provide a critical financial boost to those who likely faced the greatest challenges this year and is also relatively simple to administer.

Although these solutions would certainly still leave out many individuals suffering financial setbacks (e.g., 2020 college graduates trying to find jobs during a pandemic), it would be a much more precise way to target future stimulus payments to those most affected by the COVID-19 crisis than what Congress used for the first two stimulus rounds.

Christina Rice is the Director of the Graduate Tax Program at Boston University School of Law and an expert in the area of tax law and policy.

Tags Child tax credit coronavirus economy coronavirus relief checks earned income tax credit Income tax lost income Tax return

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