Max out this special 2020 tax credit
If your stimulus payment months ago was smaller than expected or you didn’t get a check at all, the IRS might put a little extra cash in your pocket when you file your 2020 tax return next year.
That’s because your stimulus check was really just an advance payment of a new “recovery rebate” tax credit. So, if your stimulus check came up short, you might be able to make up the difference with the new tax credit.
For retirees, there are some special twists that could affect your credit amount or eligibility, and perhaps some tax-planning opportunities to help your bottom line. The credit is only available for the 2020 tax year.
Calculating the credit
Stimulus checks and recovery rebate credits are generally calculated the same way.
Both start at $1,200 ($2,400 for joint filers). An additional $500 is then added for each child age 16 or younger. The checks and credits gradually phase out when adjusted gross income is above $75,000 for single taxpayers, $112,500 for head-of-household filers, or $150,000 for married couples filing a joint return.
Where the two differ is the information that each is based on. For most people, the IRS calculated their stimulus check using information fromtheir 2018 or 2019 tax return. If you didn’t file a return for those years but received Social Security or certain other government benefits, the IRS got the necessary information fromthe agency administering your benefits.
The credit, on the other hand, will be based on your 2020 tax return. Since the stimulus check is an advance payment of the credit, you’ll have to subtract the amount of your check fromthe credit amount. If your stimulus check is greater than or equal to the credit, your total credit is reduced to zero. If your stimulus check is less than the credit, you’ll still have some of the credit left to claim on your 2020 return.
Increasing the credit
Basing stimulus checks and the recovery rebate credit on two different tax returns “created a lot of confusing issues and perhaps planning opportunities, too,” saysMark Luscombe ofWolters Kluwer Tax& Accounting. For instance, if your stimulus checkwas reduced by the phase-out rules, you might be able to cut your 2020 tax bill by lowering your 2020 AGI.
Oneway for retirees to do that, Luscombe says, is to take advantage of this year’s required minimum distribution waiver. That’s because anRMDis taxable income that increases your AGI.
If you don’t take money out of your retirement account this year, your 2020 AGI is likely to be lower. With a lower AGI, your 2020 recovery rebate credit could be higher because it might not be phased out (or not phased out as much).
Deferring income until 2021may also help boost your recovery rebate credit. For example, if you’ve been tempted to cash out stock market gains, perhaps wait until next year. “You don’twant to forgo income to get the credit,” Luscombewarns, but youmightwant to take advantage of “ways to postpone income to get within the parameters for the credit in 2020.”