On Sunday, December 27, President Trump signed the mammoth Consolidated Appropriations Act into law (incredible that legislation with consolidated in its title would be 5,593 pages long). The law includes $900 billion – that's $900,000,000,000 – of additional relief designed to mitigate the impact our government's COVID-19 response has had on individuals, families, and businesses.
Part of this relief takes the form of $600 stimulus (also referred to as Relief, Refund, Rebate, Economic Impact, and COVID) payments for taxpayers and qualifying dependents. This article answers some common questions regarding these payments.
What are the Payments For?
As with the stimulus distributed last spring and summer, this round is the advance payment of a refundable tax credit (received regardless of whether you owe tax). It's an advance. The actual credit gets calculated on your 2020 income tax return.
Everyone who 1) files a tax return (and some that do not), 2) has income below a certain level, and 3) is not a dependent of someone else, qualifies.
How Much are the Payments?
Payments are $600 for each taxpayer and $600 for each qualifying dependent. Single taxpayers, those who file as Head of Household, and married individuals who file separately will receive $600. Married couples who file jointly get $1,200.
Taxpayers will also receive $600 for each qualifying dependent claimed on their tax return. And, there is no limit to the number of dependents that can qualify for the $600.
For example, a married couple who files jointly and has five qualifying dependents will receive $1,200 as a couple, plus $3,000 for the kids. That's $4,200 total!
Unfortunately, like any tax giveaway, some fine-print technicalities will disappoint those on the refund-bubble. One detail that has angered quite a few clients is the definition of dependents eligible for $600 payments. Second is the income limits of those who qualify. Since it's my policy to provide bad news first, I'll start with qualifying dependents.
Which Dependents are Worth $600?
The only dependents for whom taxpayers receive an additional $600 are those under 17 years old. That seems pretty simple, and it is. The problem, however, is the number of dependents for whom taxpayers receive nothing. Below is a brief list of non-qualifying dependents compiled from client-questions received this week:
High school students 17 years or older: Sure, they're eating you out of house & home, but nope.
Dependent college students: No
Disabled dependents 17 or older: No
Parents who are dependents: No
The bottom line is this: Anyone claimed as a dependent who is seventeen or older does not qualify for a $600 payment.
Worse yet, the dependent definition is a matter of law. It is not a choice made each year to maximize refunds or minimize tax due. Here's a pdf file listing the IRS rules for being a dependent. If an individual meets these requirements, they are a dependent, even if not claimed as such on a tax return.
Are there Income Limitations on the Stimulus Payments?
Yes. As with the first round of stimulus, a taxpayer's income level will limit their credit. Single taxpayers and married couples filing separately with Adjust Gross Incomes (total income minus a few items such as IRA contributions & a few other things) of $75,000 or less will receive the full credit. For those filing as Head of Household, the AGI limit is $112,500 to receive full payment. And for those married and filing jointly, it's $150,000.
Once a taxpayers' AGI surpasses these limits, their credit gets reduced by $5.00 for every $100 their income exceeds the threshold. If you'd like to estimate your credit amount, check out Forbes' $600 Stimulus Calculator.
How Are Payments Distributed?
Most recipients will receive their stimulus payments in the same manner as the first stimulus payment – be it direct deposit or check. If you filed your 2019 tax return after receiving the first stimulus payment, the IRS will use the account on this return. For non-tax filers who receive Social Security, Veteran Administration, or Railroad Retirement benefits, the IRS will use the method used to receive those payments. Those receiving these benefits via Direct Express Card will have their payment added to the card balance.
According to the IRS, some payments will get sent via debit cards. Hopefully, fewer recipients will think the card-containing envelopes are junk mail and pitch them into the trash (as they did last summer).
Taxpayers who have changed banks since filing their 2019 returns or receiving prior stimulus cannot update their information. Those who do not receive payment should check the IRS Where's My Payment Tool to see if additional information is needed. If their advance payment was not processed, they should claim the credit on their 2020 income tax return.
When will Payment be Received?
The IRS started to distribute payments via direct deposit during the last week of December. If the IRS has your direct deposit information, you will likely receive your advance by the second week of January. Checks and debit card payments will get mailed shortly after that.
To check on the status of your check, go to the IRS Where's My Payment Tool.
Will My Payment Get Garnished?
It is my understanding that payments will not get reduced for those who owe back taxes. But they will get taken or reduced for unpaid child support.
Is the Stimulus Taxable?
The payment represents the advance payment of refundable tax credit calculated on your 2020 income tax returns. The credit gets reconciled on this return, but it is NOT taxable.
What if My Advance is Too Small?
Suppose your 2019 income was higher than in 2020, and this eliminated or reduced your advance payment. In that case, any remaining credit will get calculated on your 2020 tax return. The same is true if you had a child during 2020 or had more dependents than in 2019.
What if I Received Too Much Advance Credit?
Good news! Those who received more advanced stimulus than the credit calculated on their 2020 income tax return will not have to repay the difference. Those are the rules for the first credit advance, and, as far as I know, it has not changed.
Are Incarcerated Individuals and the Homeless Entitled to Payment?
Yes. Both incarcerated and homeless individuals qualify for both rounds of the stimulus ($1,800 per individual in total), even if they do not generally file tax returns. Filing a 2020 return, however, is required to receive payment.
Please read my article on Helping the Homeless Receive Economic Impact Payments for more information. It addresses the first round of stimulus, but the same rules apply to both.
Note: I am assuming that incarcerated individuals provide more than half of their own support and are not dependents of the state or institution. I believe this was the perspective of the IRS who initially halted payment to those in jail. However, a Federal Court Judge in CA has ruled that inmates qualify so long as they are not claimed as dependents by another taxpayer. The IRS has appealed the ruling.
Closing & Invite
We hope this article answers your questions regarding the second round of stimulus payments. Before you leave, please take a few moments to check out our website and course offerings. Overnight Accountant's classes help individuals and businesses cut their taxes and reach their potential while staying out of trouble with the IRS.
All courses and articles are for informational purposes only and do not constitute tax advice. Taxes are complicated - do not act on course information without consulting a professional. Always refer to treasury regulation before making any tax decision. Read the full disclaimer.
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