As busy season approaches (or maybe some are already in busy season), new to all practitioners this filing season is the stimulus payments and the recovery rebate credit. The stimulus payments go by many names – economic impact payment one (EIP 1) and economic impact payment two (EIP 2) being the most common.
Under the Coronavirus Aid, Relief, and Economic Security Act (CARES), individual taxpayers received advance refunds of the recovery rebate credit against 2020 taxes equal to $1,200 for individuals ($2,400 for joint filers) plus $500 for each §24 (c) qualifying child (generally dependent children under the age of 17 with a Social Security number). This was EIP 1.
The recovery rebate credit phases out if income is above a threshold amount, and the rebates are completely phased out if adjusted gross income exceeds certain amounts. The IRS made advance refunds of the credit via EIP 1 during 2020, with eligibility and credit amount based on information from 2019 or 2018 tax returns.
Later in 2020, as part of the Consolidated Appropriations Act, 2021 (CCA), Congress added another round of stimulus payments (EIP 2). Eligible individuals will receive $600 ($1,200 for joint filers) plus $600 for each §24(c) qualifying child.
The payment is reduced once a taxpayer’s adjusted gross income exceeds certain amounts. As with EIP 1, these additional rebate payments are advance refunds of the recovery rebate credit. Both EIP 1 and EIP 2 are to be reconciled on the 2020 return. CCA provides that no advance refund would be made or is allowable after Jan. 15, 2021. Unlike EIP 1, funds from EIP 2 cannot be seized for child support. Both EIP 1 and 2 are protected from federal or state debt garnishment.
While many have successfully received both EIP 1 and EIP 2 in the correct amount, others have received payment(s) different from expected.
The recovery rebate credit will be reconciled on the 2020 Form 1040, U.S. Individual Income Tax Return, Page 2, Line 30. A recovery rebate credit worksheet should be used to figure the credit amount, if any, the taxpayer is entitled to receive. Your client will be able to claim the recovery rebate credit only if their economic impact payments are less than their credit. The worksheet has been updated for EIP 2; as of the date this printed, the 2020 Form 1040 instructions are in draft format and the worksheet could change before it is finalized.
Common reasons why a taxpayer may be entitled to claim a recovery rebate credit include reduced income in 2020, a change in marital filing status, a change in the number of dependents and not receiving an economic impact payment to which they were entitled; for example, not requesting payment when the taxpayer had no filing requirement in 2018 or 2019.
If an eligible taxpayer was entitled to an economic impact payment and received a payment greater than the recovery rebate credit calculated on the 2020 return, in most cases, they get to keep the original payment. The excess does not need to be repaid to the IRS.
However, in the case of the death of the taxpayer, the IRS’s frequently asked questions (FAQs) on its Economic Impact Payment Information Center webpage, may be helpful. The FAQs, while helpful, may not be relied upon as legal authority.
The FAQs for EIP 1 direct the payment or portion of it allocable to the decedent to be returned or repaid. Per the FAQ, “A payment made to someone who died before receiving the payment should be returned to the IRS by following the instructions in Topic I: Returning the Economic Impact Payment”.
The FAQs for EIP 2 state “a payment won’t be issued to someone who has died before Jan. 1, 2020. If you filed a joint return in 2019 and your spouse died before Jan. 1, 2020, you won’t receive a $600 payment for your deceased spouse, but you’ll still be issued up to $600 for you and $600 for any qualifying children, if all other eligibility criteria are met. With regard to eligible individuals who died in 2020, the recovery rebate credit may be claimed on Line 30 of their 2020 tax return.”
The IRS FAQ concerning a deceased taxpayer suggests that a person who died in 2020 is eligible for EIP 2. This would mean that taxpayers who died on Jan. 1, 2020, or later are eligible for EIP 2. EIP 1 is not available to a taxpayer who died in 2019 or in 2020 if death occurred prior to the receiving.
Now that we know the basics, the question becomes how, as practitioners, do we reconcile the payments with the credit for our clients?
If all clients were perfect, they would provide you with a Notice 1444 from the IRS that shows how much EIP 1 was issued and a Notice 1444-B that shows how much EIP 2 was issued. We can hope for the best but should be prepared for the worst.
If clients do not have these notices, there are several alternatives available:
- Have your client access or create their Tax Account. The IRS is directing taxpayers to this tool; however, be aware many taxpayers have had issues signing up with an IRS online account because they have not been able to authenticate their identities. If your clients successfully create a tax account, they should be able to print the notices or the account transcript.
- Use the Get My Payment tool; however, this only confirms the IRS sent EIP 1, EIP 2 and shows the type of payment that was made (direct deposit with last four numbers of bank account or mail). You will then need to confirm “somehow” with your client the dollar amount received. Perhaps request a bank statement to back up what they are telling you, etc. If this tool shows “Payment Status #2 – Not Available” your client will not receive EIP 2 and the payment will be received by claiming the recovery rebate credit on the 2020 tax return.
- Obtain a client account transcript after obtaining client authorization. To use this option, practitioners will need to have an e-services account with access to the IRS Electronic Transcript Delivery System, as your IRS e-services account will be used to access the client transcript. The 2020 IRS account transcripts will have IRS Code 766 (refers to tax relief credit) and Code 846 (refers to refund issued), which practitioners can use to reconcile payment(s) with the credit. This may be a limited use option, as obtaining transcripts is not very user friendly or quick.
No matter what method you as a practitioner use to obtain the notices and reconcile payment(s) with the credit, unless your client can provide you with the notices you will need to factor in spending additional time on the reconciliation.
Lastly, we wanted to provide some interesting tidbits. Every wonder where taxpayers spent the EIP 1? We did.
According to an article from cnet,“From an October study, the Federal Reserve Bank of New York asked households how many received the first direct payment (89% did) and how they used their stimulus money. The survey, which included 1,300 households, found that the median payment per household was $2,400.
According to the findings:
- 36% of stimulus payments were saved
- 35% of the money was used to pay down debt
- 18% of the funds were used for essential spending, such as necessary daily living expenses
- 8% used for nonessential spending, such as hobbies, leisure, vacation and other items respondents do not need
- 3% of the funds were donated