As of May 1, the IRS announced they had sent 122,000,000 “Economic Impact Payments” (commonly referred to as “stimulus checks”) to U.S. taxpayers via direct deposit, and they are planning to send 5,000,000 paper checks each week until all taxpayers have received their payments. If you have not already received your payment as of May 14, the IRS is no longer accepting new direct deposit details from taxpayers and will instead mail you a paper check in the coming weeks.
Wow. Obviously, this is a huge undertaking with lots of details, including how these payments will impact your 2020 tax liability.
While the amount of your check is based on your 2018 or 2019 income tax return, the stimulus payment is actually an advance refund of a 2020 tax credit to be calculated on your income tax return next year. A few weeks after you receive your check, you’ll receive a letter from the White House with the details about the payment you received. You should save this letter in your 2020 tax file. You’ll need this to prepare your 2020 tax return.
The IRS has recently clarified how the check you receive will impact your 2020 tax return next spring. In short, if you are eligible for a larger rebate amount on your 2020 tax return, you will receive an additional tax credit next year to make up the difference. But if you are eligible for a smaller rebate check on your 2020 tax return, you will not be obligated to pay back the difference.
Here are a few examples to illustrate:
Let’s assume you’re married and your 2019 adjusted gross income (AGI) was high enough that you actually phased out of some of the stimulus money and received an advance refund of $2,100. But when you prepare your 2020 income taxes next year, due to a drop in your 2020 income, you should have qualified for the full $2,400. In this scenario, you would receive the difference ($300) as a 2020 tax credit, either decreasing your balance owed or increasing your refund.
Similarly, let’s say that you had an unexpected spike in income in 2019, maybe due to capital gains from legacy stock that was sold or a real estate transaction. This income pushed your AGI higher than usual and meant that you didn’t qualify for any advanced refund/stimulus check money. Because this income was abnormal for you, your 2020 AGI is much lower than 2019, and you qualify for the full $2,400 amount on your 2020 tax return next year. This would mean that you would receive that full $2,400 as an increase in your refund or as a credit against owed taxes.
Now let’s assume the opposite is true: you’re single and qualify for the full payment of $1,200 this year. But when you file your 2020 income taxes, you realize that you made more money than you did in 2019, which would have actually reduced the stimulus amount to $800 (due to the income phase-out). You won’t be required to pay back the extra $400 you received.
Lastly, let’s say you had a teen in the house that today is under 17 and is classified as a dependent, but turns 17 before the end of the year and will lose that classification. That means you likely received $500 in your advance refund check that you qualified for based on your 2019 tax return but won’t actually qualify for based on your 2020 tax return. In this scenario, you will not be required to remit or pay the “extra” $500 dollars back.
These details are all becoming clearer by the day and we will continue to post updates as we have them, but you can also visit the FAQ section that the IRS has set up for more information:
If you have more questions or would like to chat with a Wealthquest advisor, we are here to help. Shoot us an email at firstname.lastname@example.org or give us a call anytime at 513.530.9700.
For informational purposes only. Not to be considered legal, tax, or investment advice or a recommendation of any particular security or strategy. Any information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments of the author at the time of writing and are subject to change without notice. Readers should consult their own financial, tax, and legal professionals before acting on any of the information provided.