On March 11, 2020, the World Health Organization declared that the COVID-19 outbreak was officially a pandemic as rates of infection rose significantly is the U.S. and across the world. On March 13, 2020, President Donald Trump declared a national emergency in the United States. Many states followed suit and issued a number of executive orders that closed down non-essential businesses, restricted travel and compelled many residents to stay in their home until the emergency passes. This led to unprecedented levels of economic decline, job loss and uncertainty about the future. Suddenly, many Americans found themselves with financial difficulties and, maybe for the first time, unable to pay their bills.
In response, Congress passed and President Trump signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act on March 27, 2020 to provide much needed support. Of all the measures contained in this monumental bill, the most well-known is the 2020 Recovery Rebates, better known as the “$1,200 stimulus checks” for nearly each adult U.S. citizen. These payments have been a source of welcome relief, but have also been a source of misinformation and even lies about their true nature. Do I have to file a tax return to get it? Is it considered taxable income? Do I have to pay it back? Here are the answers to those questions:
WHAT EXACTLY IS THE 2020 RECOVERY REBATE?
The 2020 recovery rebate is a refundable tax credit against your 2020 tax year liability. It is “refundable” because it means that if the amount of the credit is larger than the tax you owe, you will still get a refund for the difference. For example, if you owe $400.00 in taxes for 2020 and you are eligible for a $1,200.00 refundable credit, then you will still receive $800.00. This means that you do NOT have to owe $1,200.00 in taxes to receive it.
The 2020 recovery rebate is also an advance refund, meaning that the federal government will pay the tax credit now to eligible individuals instead of waiting for the individual to claim it on their 2020 Form 1040 next year. If you are eligible to claim the 2020 recovery rebate on your tax return, it will be reduced by the amount of the advance payment you received in early 2020 so there is no “double dipping”. 26 U.S.C. §6428(e)(1). In the case of a joint tax return, the credit will be treated as being paid 50% to each spouse. 26 U.S.C. §6428(e)(2).
This tax credit is NOT taxable income and the recipient will not be required to pay state or federal income taxes on the stimulus money. This tax credit is REFUNDABLE meaning that it is not a loan and you will not be required to pay it back even if you do not have to file a 2020 tax return. More importantly, the tax credit will NOT reduce the normal amount of the tax refund you would normally received but for the CARES Act.
WHO IS ELIGIBLE FOR THE 2020 RECOVERY REBATE?
The term “eligible individual” entitled to receive the 2020 recovery rebate means ANY individual other than:
- Any nonresident alien individual. 26 U.S.C. §6428(d)(1).
- Any individual who is claimed as a dependent on someone else’s tax return. 26 U.S.C. §6428(d)(2).
- An estate or a trust. 26 U.S.C. §6428(d)(3).
HOW MUCH IS THE 2020 RECOVERY REBATE?
The base amount of the 2020 recovery rebate is $1,200.00 per eligible individual ($2,400.00 for an eligible individual filing a joint refund). 26 U.S.C. §6428(a)(1). In addition, the eligible individual will receive an additional $500.00 for EACH qualifying child of the taxpayer. 26 U.S.C. §6428(a)(2). A “qualifying child” is an individual that, with respect to a taxpayer in that taxable year, is ALL of the following:
- Is the child (or descendant of such child) of the taxpayer, or a sibling, stepsibling (or descendent of either) of the taxpayer. 26 U.S.C. §152(c)(1)(A).
- Is younger than the taxpayer but has not reached 19 years old (24 years old if a student and no age limit if the individual is permanently and totally disabled). 26 U.S.C. §152(c)(1)(B).
- Has not provided over one-half of such individual’s own support for the calendar year in which the taxable year of the taxpayer begins. 26 U.S.C. §152(c)(1)(C).
- Has not filed a joint return with someone else. 26 U.S.C. §152(c)(1)(D).
The base amount of the recovery rebate is modified based on your filing status and income on your 2019 tax return (or 2018 tax return if the 2019 tax return was not yet filed).
For an individual whose tax status is single, married filing separately or qualifying widow (26 U.S.C. §6428(c)(3):
- If adjusted gross income was $75,000.00 or less, then the recovery rebate is $1,200.00.
- If adjusted gross income was greater than $75,000.00 but not exceeding $99,000.00, then the recovery rebate amount is reduced by $5 for every $100 above the income threshold of $75,000.00.
- If adjusted gross income was greater than $99,000.00, then the recovery rebate amount is $0.
For an individual whose tax status is head of household (26 U.S.C. §6428(c)(2):
- If adjusted gross income was $112,500.00 or less, then the recovery rebate is $1,200.00.
- If adjusted gross income was greater than $112,500.00 but not exceeding $136,500.00, then the recovery rebate amount is reduced by $5 for every $100 above the income threshold of $112,500.00.
- If adjusted gross income was greater than $112,500.00, then the recovery rebate amount is $0.
For a married couple whose tax status is married filing jointly (26 U.S.C. §6428(c)(1):
- If adjusted gross income was $150,000.00 or less, then the recovery rebate is $2,400.00.
- If adjusted gross income was greater than $150,000.00 but not exceeding $198,000.00, then the recovery rebate amount is reduced by $5 for every $100 above the income threshold of $150,000.00.
- If adjusted gross income was greater than $198,000.00, then the recovery rebate amount is $0.
To claim the tax credit, every eligible individual must be able to provide a valid tax identification number (e.g. social security number, adoption taxpayer identification number) for themselves and each dependent claimed on their tax return. 26 U.S.C. §6428(g).
DO I HAVE TO FILE A 2019 TAX RETURN TO GET THE 2020 RECOVERY REBATE?
Not necessarily. There are two circumstances where you can receive the 2020 recovery rebate if you have not filed your 2019 tax return:
- The Internal Revenue serve may instead consider your filing status and taxable income on your 2018 tax return. 26 U.S.C. §6428(f)(5)(A). This recognizes that many taxpayers may not have filed their 2019 tax returns yet due to the COVID-19 crisis and that the filing deadline had been extended to July 15, 2020.
- The individual did not file a return but the IRS received Form SSA-1099 (Social Security Benefit Statement) and Form RRB-1099 (Social Security Equivalent Benefit Statement) with respect to the taxpayer. 26 U.S.C. §6428(f)(5)(B). This is in recognition that many senior citizens whose income is almost solely social security are not required to file a tax return.
If you do not meet these exceptions and you were required to file a 2018 tax return but failed to do so, you may not receive a refund. You should take the time to ensure that your tax obligations to the IRS are up to date.
HOW WILL I RECEIVE MY 2020 RECOVERY REBATE?
Generally, taxpayers who received their tax refunds in 2018 and 2019 electronically will have their 2020 recovery rebate transmitted to the same bank account that was listed on that return. 26 U.S.C. §6428(f)(3)(B). This can create complicated situations if spouses have since divorced or the eligible individual closed the bank account. If an electronic transmission is not possible, then the IRS will mail paper checks to eligible individuals throughout the year starting in May 2020. However, given the time needed to create voluminous paper checks and the current understaffing at the IRS, it may take several months for most taxpayers to receive them. According to law, no advance refund or credit will be made after December 31, 2020. 26 U.S.C. §6428(f)(3)(A).
WILL MY 2020 RECOVERY REBATE BE GARNISHED FOR OTHER DEBTS?
Maybe. If you have past-due child support, then the payment will be offset by the amount owed. If you are married filing jointly and you filed an injured spouse claim with your 2019 tax return (or 2018 tax return if you have not filed you 2019 tax return), then half of the payment will be sent to each spouse and only the portion to the spouse who owes past due child support will be offset.
The Internal Revenue Service released a statement indicating that they will NOT garnish the 2020 recovery rebate if the eligible individual owes past-due federal taxes. However, nothing stops a private creditor with a valid court order from executing a garnishment on the recovery refund issued. For example, the creditor may execute a one-time garnishment of the bank account where the money was deposited and seize the funds.
WILL THERE BE ANY OTHER STIMULUS PAYMENTS?
As the COVID-19 emergency continues, there may be additional relief passed by Congress to help the American people through this emergency. As it stands, the current 2020 recovery rebates are the only stimulus payments available to taxpayers generally. There are additional federal funding programs available such as the Paycheck Protection Program for small businesses and additional $600.00 unemployment benefit payments for laid-off or unemployed workers. The federal tax landscape is changing by the day and the current laws and rules are subject to change. A tax lawyer can help advise you of any steps you should take to maximize your tax planning in this uncertain world. If you have any questions about the CARES Act or any aspect of federal taxation, then do not hesitate to contact the experienced attorneys at Kershaw, Vititoe & Jedinak PLC for assistance today.