Typically, the first babies born in the new year get all the front-page newspaper stories, and that will probably still be true in 2021. But while the first babies of 2021 bask in the limelight, eligible parents of those final 2020 babies will get a decent consolation prize: up to $1,100 of extra stimulus cash.
Why 2020 babies get an extra $1,100
Both rounds of stimulus payments are an advance on a 2020 tax credit, even though most people will have gotten their money long before they file their tax returns for the year. The urgency of the situation required the IRS to get those tax credits out ASAP, rather than waiting until people filed their tax returns in early 2021. To determine eligibility, the IRS had to use 2019 tax returns (or 2018 returns in some cases for the first round).
Because it's a 2020 tax credit, children born before Dec. 31, 2020, will qualify for both payments if their parents meet income limits: $500 from the first round and $600 from the second round for dependent children 16 and younger.
But because automatic payments are calculated using 2019 returns, the IRS doesn't know about any of those 2020 babies. To get your extra $1,100 of stimulus money for your 2020 bundle of joy, you'll simply need to file a tax return and get it as a refund recovery credit. The same rules apply if you adopted a child in 2020.
Plenty of 2019 babies were left out of the payments made earlier this year under the CARES Act because their parents' checks were calculated using 2018 returns. Provided that you filed a 2019 return, you'll probably get their $600 payment included with your second check. But to get the missing $500 from earlier this year, the solution is the same: File your 2020 tax return and get the money the IRS owes you as a recovery rebate credit.
What are the income limits?
The child credits are subject to the same phaseouts based on income limits as payments for adults. For every $1 their parents earn above the limits, the payments will be reduced by $0.05. The limits are as follows:
- $75,000 if you're a single filer.
- $112,500 if you're head of household.
- $150,000 if you're married and file a joint return.
But the child credits are part of your payments. In other words, the child's credit and your credit don't start phasing out separately. If you make above these limits, essentially you won't feel the impact of the phaseout of the child credit until your adult credit has been phased out.
Here's an example: Let's say you're married and file jointly with an income of exactly $150,000. Based on your 2019 returns, you would have gotten $2,400 for you and your spouse from the CARES Act, and you'll get $1,200 in the second round. If you have one child who was born in 2020 and your income doesn't change, your actual stimulus payments will be $2,900 and $1,800. You'll get the $1,100 difference as a credit when your tax return is processed.
But let's say your income for both years was $151,000. Your actual stimulus payment under the CARES Act is $2,850, and you've probably already received $2,350. For the second stimulus check, you'll be eligible for $1,750 -- $1,150 of which you'll receive in the next couple of weeks, plus the $600 credit when you file.
Now suppose your income was $200,000. You wouldn't have received any stimulus check earlier this year because for married couples, the $2,400 payments phased out completely at $198,000. But if you had a child this year, that would push your payment to $2,900, so the phaseout limit is $208,000. You'd still be eligible for a $400 credit when you file your return from the first round of checks, but your income would still be too high to qualify for the second round.
How should you spend your kid's stimulus money?
The first thing to remember is that this is your stimulus money, not your kid's. Don't feel bad for a second if you need that money for bills or to pad your emergency fund. After all, kids tend to come with a lot of surprise expenses.
But if your finances are in good shape and you don't need the money for your shorter-term expenses, this is a good opportunity to start investing on your child's behalf. You could open a custodial account through a brokerage or start a 529 plan to save for college. Having an extra $1,100 to compound over the next 18 years would be a wonderful gift for any child born into the train wreck of a year that was 2020.