Published in: Credit Cards | July 2, 2020
By: Maurie Backman
COVID-19 has severely impacted the U.S. economy. Lawmakers continue to argue over additional relief packages. It's now clear the CARES Act, which passed back in March and provided stimulus checks to eligible Americans, won't provide enough support for Americans. One recent proposal -- the Explore America Tax Credit -- involves rewarding people who spend money traveling throughout the U.S.
Possibly. Some lawmakers are calling for a tax break for Americans who take a vacation within the next couple years. Supporters hope the extra spending might stimulate the economy. Opponents warn the bill overlooks the immediate needs of millions of Americans struggling to pay for essentials, such as rent or medical bills.
The concept is currently known as the Explore America Tax Credit. If passed, it will allow tax filers to claim up to 50% of the expenses they incur in the course of domestic travel on upcoming tax returns.
The Explore America Tax Credit maxes out at $4,000, which means filers must rack up $8,000 in eligible expenses to claim that full $4,000.
Eligible expenses would include:
Any of these expenses incurred through the end of 2021 would be eligible for the credit.
A tax credit is a dollar-for-dollar reduction of a filer's tax liability. For example: Bob owes the IRS $4,000 based on his income and taxes paid during the year. Bob then applies a $4,000 credit to his return. Now, that liability is entirely wiped out.
Furthermore, some tax credits are refundable. This means the government will pay filers if there's a negative tax liability. Most credits, however, are non-refundable. The most a non-refundable tax credit can do is reduce a person's tax liability to $0. It's unclear which category the Explore America Tax Credit would fall into. Most likely, it will join the ranks of non-refundable credits.
It's still too early to tell. A tax credit for vacation expenses could motivate Americans to stimulate the economy and create jobs in the tourism industry. Unfortunately, the tax credit may not provide as much relief as lawmakers hope.
Millions of people are grappling with income loss. Many who have managed to retain their jobs in the COVID-19 crisis are using every spare dollar for emergency savings or debt payoff. Encouraging Americans to travel at a time when they can't afford to could cause more people to rack up unhealthy debt on their credit cards. For these families, traveling would make financial situations even worse.
A tax credit is not payable immediately. It only becomes available when a tax return is filed. People who incur eligible travel expenses this year would have to wait until 2021 to claim the Explore America Tax Credit -- even if they need that financial relief sooner.
Any "relief" measure that requires Americans to first pay out their own money isn't necessarily the relief Americans need right now. The Explore America Tax Credit sounds like a nice perk for people who have the cash to travel. Sadly, it's a perk millions of people can't take advantage of.
With so many COVID-19 hot spots emerging, it's easy to argue that even domestic travel may be dangerous (even deadly, for some people) in the near term. Tourism could make an already devastating health crisis even worse.
For these and other reasons, the Explore America Tax Credit might not pass. Though it's a reasonable idea in theory, it ultimately can only supplement aide such as a second stimulus check, extra unemployment benefits, or the many other relief measures Americans need during the pandemic.
If the Explore America Tax Credit is passed, it will no doubt inspire many Americans to travel. But before you pack your bags, you'll need to assess your personal situation:
If you are going to do some traveling this summer or later this year, it pays to use a travel rewards card that comes with money-saving perks. Some travel cards, for example, offer free checked baggage, which can be huge if you're a larger family taking a flight.
Americans have traveled for years without getting a tax credit in return, so if you can afford to take a trip and feel safe doing so, go for it. But if that's the case, you can still take a few steps to lower your costs. For example, you can try cashing in airline miles you already have or using hotel points to cover your stay. Keep in mind, though, that from a safety perspective, renting a private vacation home may be preferable to booking a hotel room, and a private home isn't something you can use points to cover. On the other hand, at a private home, you can cook your own meals, saving you money on restaurants.
Driving to your destination rather than flying could also be a big money-saver. And it may be a safer bet, too, especially if you don’t have to stop many times along the way.
While the summer of 2020 -- and the rest of the year, for that matter -- may not be the optimal time to travel, there are mental benefits to getting out and about. And if you wind up getting partially reimbursed via a tax credit, even better.
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