Millions of Americans received two stimulus payments in 2020, a maximum of $1,200 per adult in the spring plus $500 per child, and the December payment at a maximum of $600 per person. As you gather your tax documents and prepare for your preparation appointment you may be wondering, how does this affect my tax bill?
Are the stimulus payments taxable?
No, neither stimulus payment is considered taxable income and they will not affect your tax liability for 2020 in any way. The instructions for this year’s Form 1040 state, “Any economic impact payments you received are not taxable for federal income tax purposes, but they reduce your Recovery Rebate Credit.”
What is the Recovery Rebate Credit?
A new line was created for this year’s Form 1040 as a place to claim the Recovery Rebate Credit. This line is simply a place to claim any additional funds you are entitled to but did not receive when the economic impact payments were issued.
If you already received the maximum amount possible for the number of qualifying family members in your household for both payments, then this credit does not apply to you.
If you did not receive the full amount and are owed more, the additional money will be issued as a credit on Line 30 of Form 1040. The payment will reduce any tax liability you will owe for the year and is fully refundable. This means if you have no outstanding tax liability, then the remaining funds will be sent to you with your tax refund.
How do I know if I received the full payment?
The first economic impact payment in the spring was worth a maximum of $1,200 plus $500 for any qualifying children under age 17. The second was worth a maximum of $600 plus $600 per child. They were subject to income phaseouts at $5 less for every additional $100 in adjusted gross income over $75,000 for single filers and $150,000 for joint filers, using either your 2018 or 2019 AGI.
Your tax professional will need to know the total amount you received for each payment. Check your bank records from early spring and January if you no longer have IRS Notices 1444/1444-B that were issued as a follow up to each payment. You can also find this information if you have an IRS Secure Account. In your account under ‘Tax Records’, you will see both payment amounts listed. If you file as ‘Married Filing Jointly’, each spouse will see their own amount along with half of the dependent amount listed in their account. You will need the total for both spouses if filing jointly again in 2020.
Do I have to return the stimulus payment if I made too much in 2020 to qualify?
No. The payments were initially calculated and sent based on your 2018 or 2019 income and dependent information. If you received more money based on those calculations than you would have if the payments were calculated for 2020, you can keep any overpayment.
What happens if my dependents changed in 2020?
If you added a new qualifying dependent to your household in 2020 and meet the income requirements, you may be eligible to receive the additional $500 and/or $600 payments as the Recovery Rebate Credit. If a dependent will be filing on their own for the first time in 2020, they may be eligible to receive the Recovery Rebate Credit on their return.
Divorced parents who claim their children on alternate years may also be entitled to receive the additional dependent amount. If the parent claiming the child in 2019 received money for them last year, the other parent claiming them for 2020 may still be eligible to receive the credit this year. Talk to your tax professional about your individual situation.
Will the third stimulus check being negotiated affect my 2020 return?
While we can’t get official guidance on something that hasn’t happened yet, experts agree it’s unlikely any third payment issued this spring will require amending your already filed 2020 return. Any additional stimulus payments will likely be reconciled on your 2021 return and subject to any income thresholds and phaseouts detailed in the future legislation.
Leave the details up to us. Contact our office at 860-216-2195 to make arrangements for your tax preparation. To protect our staff and clients, we offer both virtual and phone appointments, as well as in-person appointments when necessary.