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fg9
Level 2

Ways to Lower AGI to qualify for full 2021 stimulus and child tax credit for newborn

Had a baby this year, which means we'll be eligible to receive a full stimulus check and child tax credit for them when it comes to file 2021 taxes assuming our AGI is under $150,000 (married filing jointly). Our income may come in $5-$10k above $150,000 (some of our compensation is commission-based so it's a bit of a guessing game at this point). In anticipation of this I was looking into ways to try to lower our AGI before EOY to be able to receive the full stimulus check for our baby and the full child tax credit. I was thinking of beefing up my contribution to my employer-sponsored 401k plan. Am I correct in thinking that any contribution amounts to that plan will lower our AGI for this purpose? And if so, do employer matches (mine matches $.25 for every $1) factor into the deduction amount as well? And lastly, are there any other ways to lower AGI that I should be exploring?

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Ways to Lower AGI to qualify for full 2021 stimulus and child tax credit for newborn

Yes your 401K contributions will reduce the taxable wages on your W2 box 1, which will reduce the AGI.  But the employer match doesn't go on your tax return or on your W2 so it won't affect the AGI at all.  

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Ways to Lower AGI to qualify for full 2021 stimulus and child tax credit for newborn

If you are not contributing the maximum amount of matchable funds to your 401k, that is always the way to go first, since (in your case) every $4 equals $5 invested.  If you don't get a match, an HSA (if eligible) is slightly better than the 401k.

 

Be aware, of course, that this is money you can't spend for the next 30 years or so.  If your income was $160,000, the phase out would knock $500 of your child tax credit and another $500 off the recovery rebate.  You would be investing $10,000 (that you can't get back for 30 years) to save $1000 now.  With the tax savings on the 401K, you would actually see a decrease in your take-home pay of $7000, to save $1000 on the rebates.  That's $6000 less in your pocket now, but with $12,000 invested that will likely turn into $100,000 by retirement.  It's an awesome savings opportunity, but make sure you can do without that $6000.

 

(And if you can do without that $6000 take home pay, keep your 401k contributions up even after January 1, 2022.)

View solution in original post

9 Replies

Ways to Lower AGI to qualify for full 2021 stimulus and child tax credit for newborn

Yes your 401K contributions will reduce the taxable wages on your W2 box 1, which will reduce the AGI.  But the employer match doesn't go on your tax return or on your W2 so it won't affect the AGI at all.  

Ways to Lower AGI to qualify for full 2021 stimulus and child tax credit for newborn

I know of no 4th 2021 stimulus.   The 3 stimulus that were issued are for 2020.   Any child must have been born before Dec 31, 2020 to qualify.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

Ways to Lower AGI to qualify for full 2021 stimulus and child tax credit for newborn

If you can put money into an HSA account if you qualify and/or make a deductible contribution to a traditional IRA if your income allows it. 

 

See this IRS link for Traditional IRA deduction limits when covered by a retirement plan at work.

https://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits

 

For a 2021 contribution the phase out for the spouse covered by the plan starts at a MAGI of $105,000-$125,000 on a joint return and for the spouse not covered it starts at $198,000-$208,000.

 

See the publication for the full details.

 

The maximum IRA contributions for 2021 is $6,000, or $7,000 if you’re age 50 or older by the end of the year; or your taxable compensation for the year which ever is less.

 

(Taxable compensation is generally wages that you worked for - W-2 or net self-employed income minus the deductible part of the SE tax, but can include commissions, certain alimony and separate maintenance, and nontaxable combat pay ).

 

See IRS Pub 590A "What is compensation" for details:
https://www.irs.gov/publications/p590a#en_US_2018_publink1000230355

Ways to Lower AGI to qualify for full 2021 stimulus and child tax credit for newborn


@macuser_22 wrote:

I know of no 4th 2021 stimulus.   The 3 stimulus that were issued are for 2020.   Any child must have been born before Dec 31, 2020 to qualify.


@macuser_22 this is incorrect.  The Rescue Plan Act section 9601 specifies that there will be a rebate of $1400 per taxpayer and dependent claimed on the 2021 tax return.  The Act also calls for advanced payments based on 2019 or 2020 information.  So while a dependent born in 2021 does not qualify for an advance payment, they will qualify for a $1400 rebate on the 2021 tax return.

 

The enrolled text is here.

https://www.congress.gov/bill/117th-congress/house-bill/1319/text

 

Per usual, the IRS is making it confusing.  Their documents all say that a stimulus payment won't be made for new dependents, but a rebate can be claimed on the 2021 tax return.  However they are less than 100% clear that the rebate applies to new dependents.  

Ways to Lower AGI to qualify for full 2021 stimulus and child tax credit for newborn

If you are not contributing the maximum amount of matchable funds to your 401k, that is always the way to go first, since (in your case) every $4 equals $5 invested.  If you don't get a match, an HSA (if eligible) is slightly better than the 401k.

 

Be aware, of course, that this is money you can't spend for the next 30 years or so.  If your income was $160,000, the phase out would knock $500 of your child tax credit and another $500 off the recovery rebate.  You would be investing $10,000 (that you can't get back for 30 years) to save $1000 now.  With the tax savings on the 401K, you would actually see a decrease in your take-home pay of $7000, to save $1000 on the rebates.  That's $6000 less in your pocket now, but with $12,000 invested that will likely turn into $100,000 by retirement.  It's an awesome savings opportunity, but make sure you can do without that $6000.

 

(And if you can do without that $6000 take home pay, keep your 401k contributions up even after January 1, 2022.)

Ways to Lower AGI to qualify for full 2021 stimulus and child tax credit for newborn

@Opus 17 IRS website - https://www.irs.gov/newsroom/questions-and-answers-about-the-third-economic-impact-payment-topic-b-e...

 

 

No, the third economic impact payment in 2021 will not include an additional amount for these children because the third round of payments is based on information from your 2020 or 2019 tax return. If the child is your dependent in 2021, you may claim a 2021 Recovery Rebate Credit for the child, if you’re eligible for the credit, on your 2021 tax return that you will file in 2022. 

Ways to Lower AGI to qualify for full 2021 stimulus and child tax credit for newborn


@DoninGA wrote:

@Opus 17 IRS website - https://www.irs.gov/newsroom/questions-and-answers-about-the-third-economic-impact-payment-topic-b-e...

 

 

No, the third economic impact payment in 2021 will not include an additional amount for these children because the third round of payments is based on information from your 2020 or 2019 tax return. If the child is your dependent in 2021, you may claim a 2021 Recovery Rebate Credit for the child, if you’re eligible for the credit, on your 2021 tax return that you will file in 2022. 


I know that, I just think it could be more clear.  It is @macuser_22 who was mistaken. 

fg9
Level 2

Ways to Lower AGI to qualify for full 2021 stimulus and child tax credit for newborn

Thank you, @VolvoGirl! Very helpful.

fg9
Level 2

Ways to Lower AGI to qualify for full 2021 stimulus and child tax credit for newborn

Thank you very much, @Opus 17!

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