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Everything You Need to Know About the 2020 Recovery Rebate Tax Credit, But Don’t Even Know What to Ask

Ladder Up thanks Francine J. Lipman, a William S. Boyd Professor of Law at University of Nevada, Las Vegas for compiling this summary.

The CARES Act was just signed into law, including a number of individual income tax provisions.  Here are some details on the Recovery Rebate Tax Credit:

Who qualifies for the 2020 Recovery Rebate Tax Credit? 
All adults who have a valid Social Security number authorizing work who are not claimed as a dependent on another’s tax return (for 2020). One exception to this general rule is if a married couple files jointly and one of the spouses is a member of the Armed Forces, then only one of the spouses has to have a valid Social Security number that authorizes work.

All children, grandchildren, brothers, sisters, stepbrothers, stepsisters, nieces, and nephews who live with the adult as a member of their household in the US for more than one-half of the year and who are under age 17 with a valid Social Security number authorizing work (as of December 31, 2020) (“qualifying children”)(no limit to the number of “qualifying children”).

Who doesn’t qualify for the 2020 Recovery Rebate Tax Credit?
Adults (anyone 17 and over) who are claimed as a dependent on another’s tax return and nonresident alien taxpayers will not receive a Recovery Rebate Tax Credit.

Adults (and their spouses for married filing jointly taxpayers) without a valid Social Security number that authorizes work unless one of the spouses is a member of the Armed Forces.

How Much Will I Receive?
Adults will receive $1,200 per qualifying individual ($2,400 for married filing jointly).

Adults who have “qualifying children” (as described above) will receive an additional $500 each, without limitation.

Adults who are claimed as a dependent on another’s tax return and nonresident alien taxpayers will not receive a Recovery Rebate Tax Credit.

Even if you owe the IRS back tax liabilities your Recovery Rebate will not be reduced by any outstanding tax debts, but will be offset by any amount of past due child support obligations. The Recovery Rebate is a refundable tax credit against 2020 federal income taxes so it is not gross income/taxable income for 2020.

However, the 2020 Recovery Rebate amount is reduced by $5 for every $100 above the following adjusted gross income thresholds: $75,000 for single (or married filing separately) taxpayers, $150,000 for married filing jointly taxpayers, and $112,500 for head of household taxpayers.

When Will I Receive My Recovery Rebate?
The federal government wants to push out these payments ASAP.  Therefore, they plan to deposit monies into bank accounts per 2019 (or 2018) automatic refund deposit authorizations. The Secretary of the Treasury has indicated that these payments would start in about three weeks. If they do not have this information from your tax filings they will mail you a paper check to your last known address. Needless to say, the manual check mailing distribution process will be slower than any automatic deposits for a number of obvious reasons including that the IRS is significantly underfunded, it is the middle of a busy tax season and many, if not all, of its face to face services have been shuttered due to COVID-19. The law does not permit US Treasury to send out any advance Recovery Rebates after December 31, 2020.

What Amount Will I Receive Since My 2020 Income and Other Information Is Not Yet Complete?
The federal government wants to push out these payments ASAP. Therefore, they are going to estimate your Recovery Rebate amount based upon your last tax return on record (e.g., 2019 or if not then 2018 (but not 2017 or 2016, etc.). Accordingly, your advance Recovery Rebate payment will be based upon the information from your 2019 (or 2018) tax return on file including how much your adjusted gross income was and how many “qualifying children” (as defined about) you claimed.

Tax professionals agree we will need additional guidance from the US Treasury as to which children qualify based upon their age (for example a child born in 2003 or earlier will be 17 or older in 2020 and therefore will not qualify for the $500 Recovery Rebate, but as of 2019 (or 2018) they might be under age 17).

When you file your 2020 federal income tax return in 2021 you will reconcile the estimated Recovery Rebate received with your actual Recovery Rebate based upon your 2020 tax return information. If you should have received a higher Recovery Rebate because for example you had a child in 2020 or your 2020 adjusted gross income is lower than it was in 2019 (or 2018) (e.g., due to unemployment, but remember unemployment compensation is included in adjusted gross income), you will get any amount not previously received. If you received a greater Recovery Rebate based upon your 2019 (or 2018) information as compared to your 2020 actual information you do not have to pay any excess amount received back.

Adults who have not filed tax returns for 2018 or 2019, but who received 2019 Social Security benefits will receive their Recovery Rebate based upon the information the Social Security Administration has on file. We are waiting for guidance from the US Treasury as to how this process will work.

Adults who have not filed tax returns for 2018 or 2019 (including individuals receiving Supplemental Security Income (SSI)) and did not receive Social Security benefits in 2019, may consider filing a 2019 income tax return ASAP. These individuals should consider filing electronically because the IRS has evacuated most of its on-site activities. Taxpayers should use https://www.irs.gov/filing/free-file-do-your-federal-taxes-for-free for fast and free tax preparation and filing services.

What Should I Do Now? 
First, stay healthy by staying home and washing your hands often and for at least 20 seconds. Second, if your address has changed since you last filed a tax return you should submit an address change ASAP using this Form 8822, available here https://www.irs.gov/pub/irs-pdf/f8822.pdf (using US Postal Service). Alternatively, if you have not filed a 2019 income tax return and your address or bank account information has changed from your 2018 tax return filed you might consider filing your 2019 federal income tax return electronically ASAP to update this information (including any additional “qualifying children”). However, if your 2019 adjusted gross income is higher compared to your 2018 adjusted gross income amount you should consider how the phase-out will impact your estimated Recovery Rebate based upon your 2019 information as compared to your 2018 information. If you do want to file ASAP consider using FreeFile available for free online for households with $69K income or less (available here https://www.irs.gov/filing/free-file-do-your-federal-taxes-for-free).

If you do not want to file your 2019 tax return yet, but want to update your mailing address because it has changed recently you might consider filing an automatic extension with your new address using FreeFileFillableForms (available at irs.gov https://www.irs.gov/e-file-providers/before-starting-free-file-fillable-forms) in addition to filing a paper Form 8822 using US Postal Services.

What Other Individual Tax Provisions Might Be Relevant to Me As I Try to Navigate Economic Challenges Now?
Congress has abated the 10% early withdrawal penalties on up to $100,000 withdrawn from certain retirement accounts for COVID-19 financial hardships. However, you will have to pick up most amounts withdrawn as income, but Congress will allow you to do this over three years instead of the year of withdrawal.

Seniors who are subject to mandatory required minimum distributions from certain retirement accounts because they are over 70.5 will not have to withdraw those amounts for 2020.

Unemployment compensation is taxable income so consider electing to withhold federal income taxes on any payments.