What Individuals Need to Know About the 2020 Recovery Rebates

Probably the most talked-about provision in the new Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) is the recovery rebate credit, also known as Economic Impact Payments, that will soon put $1,200 per eligible individual and an additional $500 per qualifying child into the pockets of most Americans. The law defines an “eligible individual” as any individual other than a nonresident alien, anyone who may be claimed as a dependent on another taxpayer’s return, and an estate or trust. 

Although it is a credit and will apply as an offset against your 2020 income tax, it is fully refundable (that means you will get the credit even if you don’t have any tax liability for 2020), so this is real cash in the hand! The rebate is being paid in advance this year, and the IRS has already begun sending out the payments. There is a Get My Payment link on the IRS website that allows you to check on the status of your rebate and a process for updating your bank account information and mailing address. 

The Rebate check amount is based on your filing status and adjusted gross income (AGI) for 2018 (unless a 2019 tax return has already been filed), and is phased out over the following AGI ranges:

                                              Rebate Amount        AGI Phase-out Range 

Single:                                   $1,200                        $75,000 - $99,000

Head of Household:             $1,200                        $112,500 - $136,500

Married Filing Joint:            $2,400                        $150,000 - $198,000

The rebate amount is reduced by $5 for every $100 of AGI over the phase-out range and is completely eliminated once AGI exceeds the upper limits noted above. The phase-out range is increased across all filing statuses by $10,000 for each qualifying child of an eligible individual. For example, a single eligible individual with two qualifying children would be entitled to a credit of $1,200 plus $1,000 ($500 x 2) for a total credit of $2,200 pursuant to 26 USCS § 6428(a). This credit will be completely eliminated once their AGI reaches $119,000 ($99,000 [normal phase-out] plus $20,000 [$10,000 additional phase-out for each qualifying child]).

There appears to be a planning opportunity for those who have not yet filed their 2019 tax return. Since rebate checks may be limited based on AGI as discussed above, you may want to wait until the rebate checks are mailed (or electronically deposited, if applicable) before filing your 2019 return. In this case, the rebate will be based on your 2018 AGI, which, if lower than your 2019 AGI, will maximize your Economic Impact Payment amount. And remember, there is no harm or foul by taking advantage of the 2019 filing extensions (now July 15, 2020) since the extension applies to both the filing due date AND payment of any deficiency. Of course, if your 2019 AGI is lower than your 2018 AGI, you should file your 2019 return as soon as possible. Finally, since the tax credit is for the tax year 2020, if you do not qualify for the advance payment of the credit due to high AGI based on 2018 or 2019 tax years, you may still benefit from the credit when you file your 2020 federal income tax return when your AGI is likely lower.

Since the Economic Impact Payment amount is based on your 2018 or 2019 AGI, but the actual tax credit is for the 2020 tax year, the law provides for coordination (reconciliation) of the Economic Impact Payment on your 2020 personal income tax return. 26 USCS § 6428(e).

Finally, you must file a tax return if you had a filing obligation in either 2018 or 2019 to receive your Economic Impact Payment. See the official Internal Revenue Service website for additional details.