Many Social Security retirees live on a fixed income and are struggling right now because their investments may have taken a coronavirus-related hit. Still others could find themselves with a financial shortfall in the future as COVID-19 has made an annual Social Security raise less likely and may accelerate the time when a benefits cut becomes necessary because the Social Security trust fund runs out of money.
For retirees troubled by this news, now is an opportune time to shore up your finances -- and a second coronavirus stimulus check could help make that possible.
While it's not a certainty that lawmakers will provide more COVID-19 money, the prospects for another check are good, and some action could happen as soon as this week. If you're a retiree receiving Social Security, here's what you need to know about how the decisions made in Washington could affect your finances.
Image source: Getty Images.
1. Most proposals include Social Security beneficiaries, but not all of them
There are a huge number of different stimulus proposals out there, most of which either include Social Security retirees by default or give them the option to get the money.
The HEROES Act -- which passed the House of Representatives but won't pass the Senate -- would give most Social Security beneficiaries the same payment they received the first time. But while the HEROES Act recognized the first payment was too small for most families and upped the amount awarded per dependent, most Social Security retirees wouldn't benefit from this boost since it's rare for this demographic group to claim dependents.
Some proposals, including those to provide tax credits for travel, could benefit wealthy retirees who haven't taken a big financial hit and who have the money to take trips in the U.S. However, these proposals require you to put out the money upfront for a vacation and get it back when you file your 2020 tax return, which many retirees on a fixed income can't afford to do. And with seniors especially vulnerable to serious illness if they catch COVID-19, many won't be up for a trip even if the government is willing to subsidize it.
Finally, other stimulus bills would leave out most Social Security retirees entirely, including those offering a back-to-work bonus or structured as a payroll tax credit. The simple fact is that it's rare for seniors getting Social Security retirement benefits to hold qualifying jobs, so they aren't going to get money slated as a reward for getting back to work or if workers get a tax cut.
2. The income limits could be lower this time
The first stimulus payment was available in full to single tax filers with incomes of $75,000 or less and to married joint filers earning a combined income up to $150,000. While payments began phasing out at a rate of $5 per $100 above those limits, most retirees got at least some COVID-19 money, if not all of it.
The second stimulus payment could be much more exclusive, with a key figure in the negotiations -- Senate Majority Leader Mitch McConnell -- hinting that Republicans want to set the income limit for eligibility at just $40,000. If that happens, far fewer Social Security retirees could get a check the second time around.
However, seniors do have some control over their income as much of it usually comes from investments. If you don't absolutely need the money, you may want to take less out of your investment accounts this year, so you can keep your earnings below the threshold to qualify for the stimulus payment. Because the last coronavirus relief bill suspended the required minimum distribution requirement for this year, you'll have that option if you want to take it.
3. You probably won't have to do anything to get your money -- but you may want to
To determine who was eligible for the first COVID-19 stimulus check, the IRS used data from 2018 or 2019 tax returns, since some people hadn't filed their 2019 returns yet. For Social Security retirees who don't file taxes, the IRS was able to get their details from the Social Security Administration. However, people who'd recently started their benefits and hadn't filed a recent tax return had to fill out a form to let the IRS know if they qualified.
Chances are good the IRS will be able to use the same data collected last time to send out the next stimulus payment. That means if you had to fill out forms to get the first check, you probably won't need to do so the second time around.
However, for some retirees, the IRS didn't know about their dependents because the Social Security Administration doesn't have that data, and they didn't file a recent tax return. If you have dependents and were shortchanged last time because the IRS wasn't aware of them, you may want to correct that issue if the IRS provides a way to do so. That's especially the case if the second check provides more money for dependents than the first one, as the HEROES Act would do.
4. Any payment you get won't affect taxes on your benefits
As many as half of all retirees pay taxes on their Social Security benefits. If you already got one stimulus payment and a second comes your way, you may be worried it'll push your income above the threshold at which your Social Security checks are at least partly subject to federal tax.
The good news, however, is that the first stimulus payment was an advance on a tax credit and the second likely will be too. It won't count toward your income, you won't be taxed on the money, and the checks you receive won't be considered countable in determining if you owe taxes on Social Security benefits.
Keep your eyes on Washington, but be ready in case you don't get a second stimulus payment
While getting a second stimulus payment could give you an influx of cash you need to shore up your finances for the troubled times ahead, you need to be ready to cope with the 2020 recession even if Washington doesn't send out more COVID-19 money.
The best way to do that is to make sure you're confident in your asset allocation and investment strategy in case of a potential stock market crash as coronavirus cases spike. Preparing for the likelihood there won't be a cost-of-living adjustment is also essential. Start looking for budget cuts to make and decide on a safe withdrawal rate from your investment accounts (if you haven't already), so you can make your money last in case Social Security isn't able to cover as many of your essentials over the long term.
