2020 was a year filled with disruption and change. A year that affected citizens’ personal, professional, and social lives. In response to the COVID-19 pandemic and its impact on the United States economy, Congress passed two key legislative acts in 2020 that authorized the distribution of cash to Americans. These distributions – colloquially referred to as ‘stimulus checks’ and officially known as Economic Impact Payments (EIP), have become the subject of much chatter throughout America. This communication provides an overview of these payments and how they may impact your 2020 individual income taxes.
First, in brief, let’s look at what happened. In March 2020, many Americans’ income was reduced when the government ordered businesses to be shut down to stop the spread of the novel coronavirus. Congress acted quickly by passing the CARES Act on March 27, 2020 which put cash into many Americans’ pockets for living expenses in Round 1 of stimulus payments. The CARES Act included $300 billion in one-time cash payments to individual Americans, with lower and most middle-income single adults receiving $1,200 ($2,400 for married couples) in April through August of 2020. Round 1 stimulus checks were also increased by $500 per qualifying dependent.
On December 27, 2020, President Donald Trump signed into law the Consolidated Appropriations Act of 2021 which ushered in Round 2 of stimulus payments to Americans. Payments of $600 per person are being issued beginning in late December 2020 through early January 2021.
Naturally, you may have a host of follow-up questions such as “who is eligible to receive payments?” “How do these payments work?” “How do they affect my taxes?” “What happens if I don’t get a payment, or if the payment amount is wrong?” Let us take a further look and address these items:
First, eligible recipients include US Citizens and resident aliens. Next, payments are automatic – which means that you didn’t need to do anything to receive them. If you didn’t receive a direct deposit, then the IRS should have mailed you a check (or in some instances a debit card). Lastly, if you still have not received anything and you were eligible to receive payments, then you will claim a tax credit on your 2020 individual income tax return in an amount equal to your stimulus payment.
The actual EIPs received may be less than $1,200 (round 1) or $600 (round 2) depending on a taxpayer’s adjusted gross income (AGI) in 2019. Payments become reduced or “phased-out” when AGI exceeds $75,000 (for Single taxpayers), $112,500 (Head of Household), or $150,000 (Married Filing Jointly). If a taxpayer wasn’t eligible to receive a payment because 2019 AGI was too high, but 2020 AGI was below the threshold, then the taxpayer will receive their stimulus payment via their 2020 income tax return filing. Conversely, if a taxpayer received a stimulus payment based on 2019 AGI but their 2020 AGI is now above the threshold, that taxpayer will not be required to return their payment back to the government.
This brings us to our next point – the Economic Impact Payment (EIP) is officially referred to by the IRS on your 2020 individual tax return Form 1040 as the Recovery Rebate Credit (RRC). Let’s break this down into a clever analogy. Come December, some Christmas gifts mysteriously show up under the Christmas tree before December 25. And, sometimes Santa arrives early. Well this year Santa has taken the role of Uncle Sam and donning a Coronavirus mask and American top hat. The IRS states that EIP round 2 payments should conclude in January, but if Uncle Sam’s doesn’t get it to you then, then he’ll deliver on April 15, 2021.
This means that it will be necessary for you to provide your tax preparer with information about how much you received in Economic Impact Payments (Round 1 & Round 2) before your 2020 income tax returns can be prepared.
So, where can one find how much they received in a stimulus check? The best reference is via IRS Notice 1444 (AKA the White House letter signed by President Donald J. Trump that you should have received in the mail after Round 1 payments were issued). Next, the IRS’ website “Economic Impact Payments” allows you to check your payment status at https://www.irs.gov/coronavirus/get-my-payment. Lastly, you can reference your bank statements and/or keep your EIP check stub.
Will there be more stimulus payments? This depends on the ongoing impact of the COVID-19 pandemic and on Congress’ interpretation of its economic effects. That said, Congress has demonstrated they are very willing to manipulate the tax code to achieve their objectives. In the meantime, please stay safe and don’t hesitate to reach out to your individual tax advisor if you have any specific questions.
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