As part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Congress approved a stimulus payment plan that may provide direct cash payments to taxpayers. The stimulus payments are considered advanced rebates of a refundable credit against taxpayer’s 2020 tax return. The recovery rebate advance amounts have been quoted as differing amounts, but we’ll try to explain how much taxpayers can expect to receive. While there are many moving parts related to the recovery advances, we know for sure the maximum amounts that taxpayers can expect to receive.
The refundable credit per taxpayer over the age of 17 that is not claimed as a dependent is up to $1,200. This means that a married couple can receive up to $2,400. In addition to the taxpayer amount, a rebate of up to $500 per child under the age of 17 is provided for in the bill. In other words, married taxpayers with 3 children can receive up to $3,900. However, take note that I’ve used the term “up to” quite a bit already. This is because the bill was written to phase out the rebates based on taxpayers adjusted gross income. The limitation is based on the AGI claimed on the most recently filed tax return, which will be the 2019 tax return for most taxpayers. Note, adjusted gross income is used as the basis for calculating the recovery rebates, not gross income.
As mentioned before, the mechanics of the rebate are going to be challenging. First, the payment is going to be made based on your 2018 or 2019 tax return (whichever was most recently filed). However, whether the payment is tax free, somewhat taxable, or wholly taxable is going to be dependent on your 2020 tax return. This means that the amount being paid directly to taxpayers could be subject to tax if 2020 adjusted gross income is over the credit thresholds. Now, let’s get into the actual numbers of the bill.
Remember, the payment is up to $1,200 per eligible taxpayer, and $500 per qualifying child. The AGI phase-outs begin at the following thresholds:
- Married Filings Jointly: $150,000
- Head of Household: $112,500
- All Other Filers: $75,000
Additionally, AGI over the threshold amount will start reducing your payments. The reduction amount is $5 for every $100 over the applicable threshold.
The first step in the process is to calculate the max household payment. Let’s use a married couple, filing jointly, with 2 kids as an example. Their payment would be up to $3,400 (1200 + 1200 + 500 + 500). However, taking into account the fact that the AGI on their most recently filed return is $175,000, we realize that their stimulus amount will be reduced because the phase-out begins at $150,000. In this case, we would reduce the payment by $1,250 (25000 x .05). This couple’s total recovery rebate would be $2,150.
Let’s break down the math:
Married filing jointly = $1,200 per taxpayer or $2,400 total
2 kids under the age of 17 = $500 per child or $1,000 total
AGI over phase-out = $175,000 – $150,000 = $25,000
AGI-based reduction of rebate = [25,000 x .05] OR [(25,000 / 100) x 5]
So…. (2400 + 1000) – (25000 x .05) = $2150
Let’s look at another example. A single taxpayer without any children and an AGI of $60,000 would expect to receive up to $1,200. The threshold for single filers is $75,000. Because their AGI is below the threshold, they should expect to receive the full $1,200.
Here’s one more example. A single taxpayer with a 16 year old child. This person would expect to receive a rebate of $1700 ($1200 + $500). With an AGI of $80,000, they are over the single filer limit. However, there is a higher limit for head of household filers ($112,500) so they should expect to receive the full $1,700. If we use this same example and the taxpayer has an AGI of $115,000 on their most recent tax return, they would receive a reduced rebate. In this case, the total amount received would be $1,575.
$115,000 – $112,500 = $2,500
$2,500 x .05 = $125 (reduction)
$1,700 – $125 = $1,575
Simply put, the rebate is going to be based on your filing status plus the number of children you claim under the age of 17. Any AGI over the applicable threshold will reduce the total payment by 5% of the applicable overage.
How do I find my AGI? Want to calculate your own payment? The first thing you’ll need is the AGI from your most recently filed tax return (2018 or 2019). While each form is different, AGI can be seen on line 8b of the 2019 Form 1040. Just remember that AGI may be listed on a different line if you’re not utilizing form 1040.
When can I expect my refund? And where are they going to send the check? Rebates are expected to be sent out, according to the US Treasury, within the next three weeks. Checks will be sent to the last known address (i.e. the address on your most recent tax return) or via direct deposit. If you haven’t setup direct deposit, or the information is no longer valid, the Treasury has developed a website that allows you to enter your direct deposit details for faster receipt. I want to issue a word of warning about utilizing the Treasury’s websites. There are going to be a number of scammers and hackers taking advantage of this situation. Please, please, please be careful about what you’re doing with your personal information. Remember, the IRS will NEVER call or email and ask for your personal information. Also remember to check the website you’re using as it could be a fake site. We’ll post the correct site once it is made available.
What happens if I’m not eligible for the rebate based on my 2018 or 2019 tax return? Since this is an advance on the recovery rebate, taxpayers who are ineligible based on their 2018 or 2019 income and who see a reduction in income in 2020, may receive the rebate as part of their 2020 return.
What happens if I receive a rebate that I wouldn’t qualify for based on my 2020 income? While 2020 is expected to be a year of reduced incomes, some fortunate individuals may actually see their incomes rise. In this case, if those individuals receive an advance recovery rebate for 2019 that they wouldn’t otherwise qualify for based on 2020 income, then they’ll report that on their tax return. However, as of the passing of the bill, there is no claw back provision in the law that would suggest that the Treasury will recoup an overpayment. This means that even if an overpayment is calculated, you won’t have to “repay” it with your 2020 return. Please note that this could be subject to change.