Stimulus checks have been a lifeline of relief for many Americans during the Covid-19 pandemic. Whether from layoffs, reduced hours or closed businesses, so many people experienced the severe negative financial impact of the pandemic.
There is significant need for these checks. A recent Bankrate survey found that 71% of those who received or anticipated receiving stimulus money considered it to be important to their financial situation in the near future. Treasury’s ability to quickly get the funds out to taxpayers has helped sustain many.
But there is a group of individuals still waiting on stimulus checks to appear in their bank account: those who had a significant drop in income between 2019 and 2020.
“For taxpayers who experienced a significant loss of income in 2020, their stimulus payments may be lower because the IRS calculates their payment based on their 2019 taxable income,” says Colin Horsford, CPA and Managing Partner at Horsford Accounting & Advisory in New York City.
Due to the critical nature of getting funds to taxpayers, the IRS and Treasury decided to use taxpayer’s adjusted gross income (AGI) in either 2018 or 2019. To qualify, a single taxpayer’s AGI needed to be $75,000 or below; for those who filed married jointly, the AGI needed to be $150,000 or below. Both amounts were subject to a phase out where the stimulus check was reduced. For the first stimulus check, it was $1,200 for single filers and $2,400 for joint filers plus $500 per qualifying child. For the second check, it was $600 for single filers and $1,200 for joint filers plus $600 per qualifying child.
As a result, for those whose incomes dropped significantly, the lack of a check is frustrating. So, what are their best next steps to obtain their stimulus checks?
Built-in Process
Congress knew this would be an issue when they structured the CARES Act. The stimulus checks were really a rebate against the 2020 income tax return. As a result, they have built in safeguards to protect those whose 2020 income would allow them to qualify versus their 2018 and 2019 incomes.
“Taxpayers who believe they're entitled to a larger stimulus payment can file a Recovery Rebate Credit on their 2020 Form 1040 or Form 1040-SR to claim up to the maximum amount of the credit,” explains Horsford.
Taxpayers in this situation should consider filing their taxes as soon as possible. Keep in mind that the earliest that taxpayers can now file their 2020 tax is February 12, 2021 per the IRS announcement.
“If they can show that their income in 2020 was below the threshold for either or both payments, then they should get those payments when they file,” says Greg Zbylut, partner at Breyer Andrew LLP in Pasadena, California.
Further, taxpayers who had a drop in income but are unsure if they are eligible to claim the Recovery Rebate Credit, should still proceed.
“Taxpayers have nothing to lose by properly applying for the credit since it won't increase their taxable income or reduce their refund,” advises Horsford.
Nuances to Consider
Like with all tax issues, there are grey areas that could impact receiving the stimulus money.
One issue is that the IRS is still processing 2019 tax returns as we enter the 2020 tax filing season.
“There are still quite a number of people whose 2019 return, for one reason or another, is still in the queue for processing,” says Zbylut. “It is possible that someone did not get either a $1,200 or $600 stimulus payment because 2018 income was too high, and was the only year available.”
Further, the stimulus check was a rebate against 2020 income. If a taxpayer owes for 2020, the rebate will be used to offset the taxes.
“If a taxpayer files her 2020 return, and shows she should have gotten both rebates, for a total of $1,800 but her tax return shows she owes $2,000 - say for unemployment earnings for which no tax was withheld - then taxpayer now only owes $200 - the $1,800 went to offset the balance due,” explains Zbylut.
That might be a surprise for taxpayers who need the stimulus check to help with other areas of their personal finances.
Tax Guidance May Help
Given the need for these checks, it might be a good idea to connect with a tax professional for guidance. This rebate can be confusing especially since there are three different tax years to consider for eligibility.
Further, talking to a tax professional might also open up other opportunities.
“There are many CARES Act provisions that were enacted to help taxpayers affected by the pandemic,” explains Horsford. “It is best for taxpayers to work with an experienced tax professional to take advantage of all tax benefits available to them.”
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