With all of the confusion, misinformation and snafus over the last year, it’s very possible that some of your clients never received economic impact payments to which they were entitled.
The good news is that those clients may be eligible for a recovery rebate credit on their 2020 federal tax returns, says the Internal Revenue Service. In addition to people who never saw the payment arrive in their mailboxes or lost the EIP debit card or check they did get, people who didn’t qualify previously but do qualify based on their 2020 income may also be able to claim the credit. Even people who received partial impact payments may qualify for the credit if their income dropped in 2020.
That’s because the impact payments, distributed because of the recession caused by COVID-19, were based on 2018 or 2019 adjusted gross income, but the credit is based on AGI in the 2020 tax year.
Clients who clocked more AGI in 2020 and who already received impact payments do not have to pay them back. The law does not include a provision for paybacks even if those individuals would qualify for a lesser amount based on their 2020 tax returns, the IRS says.
If you received the full amount for each EIP, you won’t need to include any information about either when you file your 2020 tax return, the IRS says.
According to an article by CNBC, similar rules will apply for the third stimulus payment, being mailed out now to taxpayers. The new $1,400 payments will be based on the most recent tax returns on file, but if individuals lose income in 2021 that makes them eligible, they’ll be able to apply a tax credit to their 2021 returns.
The first stimulus payment was $1,200 ($2,400 if married and filing jointly) plus $500 for each qualifying child, and the second payment was $600 ($1,200 if married jointly) plus $600 for each child.
According to the IRS you are eligible for the recovery rebate credit if you were a U.S. citizen or U.S. resident alien in 2020, were not a dependent of another taxpayer, and have a Social Security number that is valid for employment. Your credit amount will be reduced if your adjusted gross income (AGI) is more than:
• $150,000 if married and filing a joint return or filing as a qualifying widow or widower.
• $112,500 if filing as head of household.
• $75,000 if filing as a single or as married filing separately.
Payments will be reduced by 5% of the amount by which your AGI exceeds the applicable threshold above. For example, if you were a married couple filing jointly with no children who did not qualify for any payments based on 2018 or 2019 AGI, but had $200,000 of income in 2020, you might now qualify for an $1,100 rebate [($2,400 +$1,200) – $2,500 = $1,100].
You can find a lot more information on the IRS page Recovery Rebate Credit
Frequently Asked Questions.
Dorothy Hinchcliff is publisher of Rethinking65. Please reach out to her at email@example.com with your ideas for contributions to www.rethinking65.com.