As part of the CARES Act signed by the President on March 27, 2020, eligible individuals will receive an advance payment (rebate) of a credit that will be claimed on the 2020 tax return.
It is important to read the section "Should I file my 2019 tax return now or wait?" below, as it may impact whether you receive your advance rebate or have to wait for the 2020 return to see if you qualify for the credit.
Eligibility and Payment Amounts
U.S. Residents with adjusted gross income (AGI) of $75,000 (single filers), or $112,500 (head of household filers) and $150,000 (married filers) and who are not a dependent of another taxpayer are generally eligible for the full rebate. You also must have a work eligible Social Security Number.
(You can find your 2018 tax return AGI on page 2, Line 7 and on your 2019 return on page 1, Line 8b)
The rebate is $1,200 per taxpayer and $2,400 for a married couple filing jointly. In addition, you are eligible for a rebate for each child. For a child to be eligible, they must be under age 17 and a qualifying child for the child tax credit.
The rebate is not taxable, and no action is required on your part to receive the credit.
Phase-Out of Rebate Payments
If your adjusted gross income is above the income thresholds noted above based on your filing status, then you will received a reduced credit or no credit. Here is how the credit is reduced:
- The rebate is reduced by $5 for each $100 that a taxpayers income exceeds the phase-out thresholds above.
- The rebate is completely phased-out for single filers with income exceeding $99,000; $146,500 for head of household filers, and 198,000 for joint filers with no children.
Example 1a - Jack and Diane are married and have child, John who is 14 years old. Their Adjusted Gross Income (AGI) for 2019 was $126,000. Their rebate will be $2,900 ($1200 for Jack, $1200 for Diane, and $500 for John).
Example 1b - Jack and Diane were also married in 2018, so the same facts apply except their AGI in 2018 was $275,000. Jack and Diane would not receive a rebate of $2,900 based on their 2018 AGI.
Should I file my 2019 Tax Return Now or Wait
Take a look at the example for Jack and Diane above. Jack and Diane were eligible for the rebate in 2019 (Example 1a). Based on their 2018 AGI; however, they would not eligible for the rebate. It has been reported that the IRS will look first for the 2019 tax file to determine eligibility for the credit. If the 2019 return has not been filed, then they will look to 2018.
In this instance, Jack and Diane may want to get their return filed as soon as possible to receive the rebate earlier. Filing now will let the IRS know that their income level meets the guidelines for the full rebate. Remember, their AGI was too high in 2018, and the IRS would assume they do not qualify for the credit. So, if this example is you, get that 2019 return filed.
Let's switch things up a bit....
Example 2 - Charles and Kristy are married and have one child, Donny. Their AGI for 2019 and 2018 is noted below:
2019 AGI $223,000 / 2018 AGI $126,000
What might Charles and Kristy consider when contemplating filing their 2019 tax return? Well, if Charles and Kristy file their 2019 tax return prior to the stimulus checks being sent, then they will not qualify to receive the rebate. Their AGI is above the limit. If they wait and file the 2019 return until after the stimulus payments are sent, then they should receive a rebate. The rebate based on 2018 AGI for Charles and Christy would be $2,900 ($1200 for Charles, $1200 for Kristy, and $500 Donny).
Note above, if the IRS looks to the 2018 return, it will show they meet the AGI limits to receive the full credit.
The 2020 Tax Return
Remember, earlier I mentioned the rebate is simply an advance payment of a credit that will be claimed on the 2020 tax return. So, even though all my examples have been about the 2019 or 2018 tax return AGI amounts, the credit is based on the 2020 AGI.
When you file your 2020 tax return, the credit will be computed based on the AGI for 2020. So now lets look at some examples.
Remember Jack and Diane? Based on Example 1 above, they received a rebate of $2,900. Let's suppose their AGI for 2020 is $142,000. They will compute a credit of $2,900 on the 2020 tax return, and since they received the rebate of $2,900, they are not entitled to any additional credit (It will just zero out).
Let's go back to Charles and Christy now (Example 2 above). Charles and Kristy delayed filing their 2019 return (because their income was too high) and the IRS based the payments on the 2018 return, and they received a rebate of $2,900.
Charles and Kristy's AGI for 2020 is $241,000 (It is still too high). Charles and Kristy will complete the credit worksheet for 2020 and determine they are not entitled to the credit. They will not have to repay the rebate they already received. So, that is why Charles and Kristy decided to delay filing the 2019 tax return.
What if I did not receive the rebate?
If you do not receive the rebate check, then most likely your AGI for 2019 or 2018 (if you had not filed 2019) was over the limit.
Example 3 - Greg and Dharma are married and have one daughter, Ally. They did not receive a rebate because their 2019 AGI was too high. They file their 2020 income tax return, and their AGI is $137,000. They compute the credit, and learn they are entitled to a credit of $2,900. They will receive the credit as a reduction in the 2020 tax return balance due or as an increase to they refund they will receive. So, they are made whole in 2020.
The Rebate and Social Security Payments
Updated March 30, 2020 (IRS Notice 2020-61)
People who typically do not file a tax return will need to file a simple tax return to receive an economic impact payment. Low-income taxpayers, senior citizens, Social Security recipients, some veterans and individuals with disabilities who are otherwise not required to file a tax return will not owe tax.
What else do I need to know?
The IRS will send rebates to your bank account on record. If there is no bank account on record, then the IRS will send your payments to the address on record. So, take care that you change your address with IRS on your 2019 tax return if you have moved.
This is part 1 of our coverage of the CARES Act. You can interact with us on Facebook at @bradleysmithinc. Our office is located in Lubbock, but we serve clients throughout the state of Texas.