As many are aware, the COVID-Related Tax relief Act has released a second round of economic impact payments (EIP), recovery rebates, and stimulus payments. These payments are in addition to the recovery rebates that were issued throughout 2020 to many taxpayers as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
The first round of payments was $1,200 per eligible individual and $2,400 for married couples filing a joint return. There was an additional $500 for certain eligible dependents based on the taxpayers’ adjusted gross income (AGI) for 2018 or 2019. The payments were reduced or phased out if AGI exceeded:
$150,000 if married filing a joint return
$112,500 if filing as head of household
$75,000 if using any other filing status
For each qualifying child eligible for the $500 addition, the threshold amounts above increase by $10,000 and the phaseout is $5 for every $100 that your AGI exceeds these thresholds. For example, if a married couple with no children filed a joint return and had AGI of $169,000 on their 2019 tax return, their payment would have been decreased by $950 and instead of receiving the $2400 they were eligible for, they would have received $1450.
The second round of payments are $600 per eligible individual ($1,200 for married couples filing a joint return) plus $600 for certain eligible dependents. These payments are also based on the taxpayers’ AGI as filed on their 2019 tax returns. The payments will once again be reduced or phased out at the same rate if AGI exceeds the thresholds noted above.
Both rounds of these recovery rebates are an advance of a refundable tax credit that will be calculated on 2020 individual income tax returns. The actual credit amount will be determined based on a taxpayer’s 2020 AGI and number of eligible dependents claimed. Once the actual credit amount is calculated on the 2020 tax return, it will need to be compared to the payments that were actually received during rounds one and two. If the actual credit is higher than what was received, the taxpayer will receive the difference as a refundable tax credit on their 2020 return. If the actual credit happens to be less than what was received, the taxpayer will not have to pay the difference back, they simply won’t have any additional tax credit to claim on their 2020 tax return.
If the couple above has their first child during 2020 and sees a decrease in AGI to $157,000 when they file their 2020 tax return, the amount of refundable tax credit they will be able to claim against their 2020 tax liabilities will be calculated as follows:
The maximum amount allowed would have been $2,400 for married couples filing a joint return and $500 for the child being claimed on the 2020 tax return – even though the child was born after the first round of payments. The AGI threshold would be $160,000 ($150,000 plus $10,000 for the child) and since their AGI was only $157,000 for 2020, there would be no reduction in the maximum amount allowed. The couple would have been eligible for $2,900.
Maximum amount allowed would be $1,200 for married couples filing a joint return plus $600 for the child. As determined above, there would be no reduction in the maximum amount allowed since their AGI for 2020 is below the threshold.
Total Credit Allowed: $4,700
Total Payments Received: $1,700
2020 Refundable Credit: $3,000
Our couple will be able to claim a credit of $3,000 against their 2020 tax liability and, if this is more than the tax they owe, they will be able to request a refund for the surplus.
The IRS mailed Notice 1444, Your Economic Impact Payment, to each taxpayer who was issued a recovery rebate during round one and will be issuing a similar Notice 1444-B to anyone who receives a payment during round two. In order to appropriately calculate any remaining credit you might be eligible for, it will be important for you to provide copies of these notices to your tax preparer when submitting information for the 2020 tax returns .
For more information you can visit the IRS’ website at https://www.irs.gov/coronavirus/economic-impact-payments or feel free to reach out to your One River CPAs contact.