Millions of Americans have already received their economic impact payments authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. If you have not received a payment or received an amount larger than you anticipated, you may be looking for some answers. But first, a little background on the payments:
- The payment is actually a refundable credit that will be computed on your 2020 tax return based upon your 2020 family composition and adjusted gross income (AGI) that is being paid in advance.
- The credit is $1,200 for each individual other than dependents.
- Each individual (or married couple) with a dependent child under the age of 17 will receive an additional $500 for that child. There is no additional $500 credit for children 17 or over or for other dependents.
- The payments are meant to assist lower-income individuals and families, so the amount of the payment is reduced for higher-income individuals. The reduction begins when a single individual’s AGI reaches $75,000 ($150,000 for married couples). For those that file as head of household, the reduction begins at $112,500. Payments are reduced by 5% of AGIs exceeding these thresholds.
- No payment will be made to someone without a Social Security number.
If this refundable credit is based on a 2020 tax return that won’t be filed until next year, how does the IRS know how much to pay in advance? Good question! Since the purpose of these advance payments is to quickly get money in the hands of those who need it during this crisis, the government looked for a way to estimate the advance payments, and the most expeditious method was to base the payments on family composition and income from 2019 tax returns or 2018 returns for those who haven’t yet submitted their 2019 returns. You can use the table below to compute what your advance payment would be based upon your 2019 or 2018 filed return and what the credit will be on your 2020 return.
(1) Find your AGI on 2019 Form 1040 or 1040SR, line 8b, or on 2018 Form 1040, line 7
(2) MFS = married filing separately
Where the 2019 or 2018 return resulted in a refund and included direct deposit information, the advance payments were direct deposited into individuals’ or couples’ bank accounts. These direct deposits were made very early in the process. There have been hiccups in which bank account information had changed since the returns were filed, in which case those individuals have to wait for a check to be mailed later.
By now, you should begin to see where some problems might arise. Suppose you and your ex-spouse filed a joint 2018 return and were divorced in 2019 but haven’t filed your 2019 returns yet. Where will the joint payment go based upon the 2018 return? Or suppose you added a child to your family in 2019 but didn’t file the 2019 return in time, and the payment was based on your 2018 return. Your payment will not include the extra $500 for your dependent child. We could go on and on with all sorts of scenarios that are creating unexpected results.
These payments are due to more than just those who filed a 2019 or 2018 tax return. There are many Americans who are not required to file a tax return, including retirees receiving Social Security (SS) or Railroad Retirement, SS disability, SS survivor’s benefits, and veterans’ benefits, as well as those who should have filed returns but have not and the homeless.
To reach as many of those individuals as possible, the IRS is automatically making payments of $1,200 to recipients of Social Security or Railroad Retirement, SS disability, SS survivor’s benefits, and veteran’s benefits who have not filed a 2018 or 2019 tax return. Of course, the IRS has no way of determining if individuals in these categories have spouses who are not receiving benefits or if they have dependent children under the age of 17. These individuals were given the chance to provide their spouses’ and dependent children’s information to the IRS prior to payments being made. Unfortunately, the time to provide that information has passed. Where the IRS has direct deposit information, the payment will be deposited into the individual’s bank account. Others will have to wait for a paper check.
Those who are not in any of the previously discussed categories can provide their information to the IRS by using the non-filer tool on the IRS web site.
If the IRS does not have your direct deposit information, it has changed, or the bank rejected the IRS’ attempt to deposit the payment, you will receive the payment by check. The checks are being issued to the lowest-income individuals first, where the need is the greatest, followed by others with increasing incomes. Here is the estimated release schedule for the payments by check.
The next big question you might have is “What happens if the IRS does not send me an advance payment?” Well, all is not lost, because the payments, as explained earlier, are an advance on a refundable credit allowed on your 2020 tax return when it is filed in 2021. So, if you were short-changed on the advance payment, you will get your payment or any shorted amount as a refundable credit on your 2020 return.
Example: Don and Shirley, whose AGI is less than $150,000, are newlyweds with no children and filed a joint return in 2019. They receive an advance economic impact payment of $2,400. In 2020, they have a baby, and when their credit is determined on the 2020 return, it is $2,900 ($1,200 + $1,200 + $500). Since they only received $2,400 as an advance payment, they will be entitled to a $500 refundable credit on their 2020 return. The credit will first be used to reduce their tax, and then any excess credit will be refunded.
However, keep in mind that the 2020 credit is based on filing status, dependent children under age 17, and AGI for 2020. The advance payment was based on filing status, children under age 17, and AGI for 2019 or 2018, which can create some substantially different results.
Of concern to those whose advance payment was too large is whether the excess will have to be repaid. The CARES Act that authorized this credit and the advance payments specifies that any amount by which the advance exceeds the credit computed for the 2020 tax return does not have to be repaid.
Example: Shelly, a single parent, files her 2019 return claiming her 15-year old daughter, Whitney, as a dependent. Shelly’s AGI is below $75,000, so Shelly will receive an economic impact payment of $1,700 ($1,200 for herself and $500 for Whitney). In 2020, Whitney goes to live with her dad, and so when Shelly files her 2020 tax return, she no longer has a dependent child under age 17. Thus, the credit computed on her 2020 return is only $1,200. However, Shelly does not have to pay back the difference.
As you can see, there are any number of variations that can impact how the advance payment was determined and how the credit is figured on the 2020 return, including marriage, divorce, births, deaths, emancipations, and AGI.
If you have any questions, please give our office a call.