Please ensure Javascript is enabled for purposes of website accessibility

The Shock That Could Await You in President Trump's Stimulus Plan

By Christy Bieber – Aug 26, 2020 at 8:01AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

You may have to pay a big delayed tax bill because of it.

With the country officially in a recession, many Americans are struggling financially. Lawmakers from both sides of the aisle have put forth proposals for assistance, including a second COVID-19 check. Sadly, no bill has majority support, and the Senate has now gone on recess without offering any additional coronavirus relief. 

In lieu of Congress' failure to act, President Donald Trump signed several executive orders he indicated are meant to offer financial assistance during these troubled times. But one of them isn't as good a deal as it appears to be. In fact, it could lead to a very unpleasant surprise in the end. 

White House.

Image source: Getty Images.

Here's the potential shocker in the president's proposed payroll tax cut

Under the president's executive order, the collection of Social Security payroll taxes will be deferred from the start of September until the end of December 2020. Employees pay these taxes at a rate of 6.2% of wages up to annual limits, with their employers paying the same 6.2% on wages. But under Trump's plan, workers with incomes up to $104,000 would be eligible for a payroll tax deferral. 

If the taxes are not collected for four months, workers would see extra money in their paychecks for a limited period of time. In fact, those earning the maximum $104,000 might get an extra $124 per week in take-home pay because payroll taxes wouldn't be taken out of their checks. This won't be the case for all workers, as some employers may opt out of deferring the collection of taxes -- but it could happen for many Americans.

The only problem is, the president doesn't have the authority to permanently cut those payroll taxes without action from Congress -- and lawmakers on both sides of the aisle have objected to a payroll tax cut as a form of coronavirus stimulus. So despite the president's pledge that he'd make sure the deferred amount is forgiven, there's a very substantial chance the money would need to be paid back if it's not taken out of weekly paychecks. 

To be clear, unless Congress acts to forgive unpaid payroll taxes that the president has indicated don't have to be collected, you will owe this money in the end. The executive order isn't a stimulus bill; it's a loan of money you owe the IRS. And if you don't realize that, you could be in for a very unpleasant surprise.  

In fact, if the President isn't successful in getting the deferred taxes forgiven, an individual with $104,000 in income would end up owing $2,232 come tax time in 2021. And while you'd have had the use of that money until the bill comes due instead of having it paid to the IRS over time, an extra $2,232 tax bill could be shockingly if you aren't expecting it -- especially since the extra $124 doled out in your weekly paycheck might not make that much difference for your monthly budget. 

Don't count on more stimulus money

Sadly, the chances that you'll get a real second stimulus check aren't very good. Lawmakers have all but given up on compromise legislation that includes one, instead considering a pared-down "skinny" relief bill. And by the time the Senate returns from recess, there will be just weeks left until the election, so it's likely that lawmakers will be too busy with other issues to pass compromise legislation. 

Without another stimulus check coming, you'll want to make sure you're as prepared as possible for the 2020 recession. The unemployed need to find work and/or side gigs, make budget cuts, and max out available benefits. And even if you still have a job, you should be reviewing your investment strategy, ensuring you aren't overinvested in the stock market, and boosting your emergency fund to avoid financial damage if COVID-19 makes the economy worse. 

The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
342%
 
S&P 500 Returns
107%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.