- February 15, 2021
- Tax Preparation
Making sense of stimulus payments on this year’s tax return.
As we all know, there’s nothing simple about filing tax returns, even in a normal year. But 2020, as we know, was not normal. It was full of complexities that will significantly affect tax filings this year.
One of them seems simple but actually is raising a lot of questions: stimulus payments.
The federal government has sent two stimulus payments (also called economic impact payments) to taxpayers. In spring, any adult whose individual adjusted gross income (AGI) was up to $75,000 (singles/marrieds filing separately) or up to a combined $150,000 for married couples received $1,200 per person. Added to that was $500 per qualifying child under the age of 17. For people whose salaries went above these thresholds, payments were lowered according to salary, based on a formula used by the IRS. Single taxpayers with AGI over $100,000 and marrieds with AGI over $200,000 have not been eligible for this aid.
Following that, in December, every American (including children) received an additional $600.
Technically, this is “free money.” By that I mean you are not expected to pay it back, and it is not considered taxable income. But CPAs like myself are realizing that the payments are not a cut-and-dried matter, and for many there are questions regarding how much they should have received and whether they’re still owed money, among other issues.
Some people received payments, some did not. Some saw their incomes changed, affecting how much they should have received. Some even received too much, in error, and are concerned about paying it back. Let’s address these concerns and what they mean for you:
What year was used to determine income? Good question. For some, it was 2019. For some, it was 2018. For some it was 2020. The issue gets more complicated if your income went up or down in any of those years. If it was previously above the income thresholds and dropped below them, you may be owed money. If it increased to above the thresholds, you may have received more than you might think you were owed.
Bottom line, be very sure how much you received (or didn’t) and be sure you let your CPA know upon filing your return how much you did or didn’t receive. In the mail, you should receive an IRS Notice 1444 for the first payment and a Notice 1444-B for the second. Provide these forms to your tax preparer. You won’t owe taxes on payments, but it’s important to acknowledge what you received. Without that information, it’s impossible to produce an accurate return. Payments also may erroneously be recorded as taxable income, which could mistakenly add to your tax burden, so it behooves you to share this information.
What if I received a higher stimulus payment than I should have due to my 2020 income being above the threshold? You are lucky — you don’t have to pay it back. I recommend putting it in some sort of savings vehicle.
What if I didn’t receive my payment, or I didn’t receive enough of it? You can still receive your full payment by claiming a Recovery Rebate Credit when you file your tax return. This credit would be claimed on a worksheet included in your Form 1040 or 1040-SR. The credit will either be sent to you as a refund or reduce the amount you would owe for 2020.
If I didn’t receive full stimulus payments in 2020 due to a high reported income, is there any way I can still qualify for the maximum payments? It may be possible to adjust your gross income for 2020 and bring it below the threshold for full payment ($1,200 + $600 per adult). For example, let’s say your income in 2020 was $155,000 — that’s $5,000 over the threshold for the full stimulus payment. But let’s also say you purchased a new truck you’ll use for your business. On your business return, you have a choice of whether to deduct the entire amount in one year or take it in installments over five years. If you take it all at once, you would lower your adjusted gross income below the $150,000 threshold, qualifying you for a full stimulus payment. And yes, as long as your 2020 income is below the threshold level, you are owed a credit for the full stimulus payment regardless what your 2019 AGI was. You can also lower your income by making IRA or Health Savings Account contributions toward the 2020 tax year before April 15.
What if someone in my household died but received the payment(s)? The answer to that question still is unclear as I write this. The IRS wants that money back, but right now it’s unclear whether there is a mechanism in place to enforce the collection. If this situation applies to you, please consult your tax professional. The last thing you want is to be charged later on for this mistake; be up front about it to avoid run-ins with the IRS it down the road.
What if an adult was claimed as a dependent in 2019 but otherwise qualifies for the full stimulus check? This could have happened for a number of reasons. Perhaps you have a child who now lives on their own. If they filed their own tax return instead of being claimed as your dependent, the child could be eligible to receive the full $1,200 (remember that you did not get any money for dependents over 17 years old). This might also be the case if, for example, a retired senior living with you were claimed previously as a dependent but could technically file a return. In either case, an individual tax return as a nondependent might result in receiving the full $1,800 as a credit or refund.
What if my ex-spouse and I share custody of a dependent? Many divorced couples take turns claiming their children as dependents, with each benefitting every other year. In that case, one parent may have received both the $500 and $600 stimulus payments for each child in 2020. But what if you’re the other parent and missed out on stimulus for your kids in 2020? I have good news: You’ll get both payments for each child you claim on your 2020 tax return (even if the other parent has already received money for the same children based on 2019 filings). Be sure to let your tax preparer know to file the Recovery Rebate Credit for you this tax season.
What if I got divorced in 2020? How should I handle the stimulus payments on my taxes? If you previously filed jointly, your payments would have come to you in one lump sum of $2,400. Each of you will need to file separately for 2020 and claim 50% of the payment ($1,200 per adult) on your tax return. Dependent stimulus payments should be reported by the parent who is claiming the child/children on the 2020 return.
What if I’m a retiree who doesn’t usually file a tax return and didn’t make enough income in the last few years to file? How can I claim my stimulus payments? Social Security recipients should have received payments, but some slipped through the cracks. If you didn’t receive your payments and are owed them, you’ll need to file a return this year in order to claim them.
What if I have a balance with the IRS, or I’m paying on an installment agreement? Can I still get a stimulus credit or refund? If you didn’t receive some or all of your stimulus, you should still receive it, even if you have bad debt with the IRS. Make sure you talk to your tax preparer about filing a claim for it. That money should be sent to you so that you can determine how best to use it — whether that’s toward your IRS debt or something else entirely.
NOTE: The only time this doesn’t apply is when you owe back payments on child support. The federal government takes this seriously and will deduct your stimulus payments from it before sending you whatever is left (if anything).
Do you have a question about stimulus payments or any other tax concern that I haven’t addressed? Give us a call or send us an email! We’d be happy to talk to you about simplifying this year’s tax filing process.