Make sure you received your stimulus payments

There has been a whole lot of discussion about the Economic Recovery Rebates more commonly known as the stimulus payments. At this point there have been three separate rounds of stimulus payments as a result of the ongoing coronavirus pandemic. Despite the fact that these payments are not taxable income it is important that they are properly tracked and reported on the tax returns. The reason for reporting the stimulus payments is that you may qualify for the Recovery Rebate Credit if you did not receive the stimulus payment or did not receive the full amount.

There has a been a great deal of confusion and questions around the stimulus payments as they are part of the income tax reporting for the 2020 tax filing. The stimulus payments are not taxable income. Adding further confusion is the fact that the second stimulus payment was generally received in early 2021 but still is included with the 2020 tax reporting.

For the 2020 returns that taxpayers have been filing and continue to file, the first two separate payments need to be reported. The first payment came in mid-2020 and was for up to $1,200 for each taxpayer or spouse and an additional $500 for each qualifying dependent. The second payment came in late 2020 or early in 2021 and was for $600 for each taxpayer, spouse, or qualifying dependent. The third stimulus payment for $1,400 each taxpayer, spouse, or qualifying dependent does not impact the 2020 tax filing. It is expected that the third stimulus payment will impact the tax filing for 2021 tax year in a similar manner to how the other two stimulus payments are impacting the 2020 tax year filing.

If a taxpayer did not receive their stimulus payment at that time they may be able to receive the difference between what they did actually receive and what they are eligible to receive based on their 2020 tax filing. These additional funds would come in the form of a Recovery Rebate Credit on their 2020 tax return which effectively reduces the tax balance due or increases any refund that they are entitled to receive. If a taxpayer received a stimulus payment but would no longer be eligible based on higher income in 2020 they are not obligated to pay the amount back.

There are income thresholds for the stimulus payments and there is phaseout range once the income reaches a certain level until the stimulus eligibility is fully phased out. The income phase-out range varies a bit in the various stimulus rounds, but generally for an individual taxpayer the phaseout begins with an adjusted gross income level of $75,000 for an individual taxpayer and $150,000 for a married taxpayer.

There are a number of tax planning opportunities related to maximizing the receipt of the stimulus payments or economic recovery rebate credit on the taxes based on tax filing choices. It may benefit a couple to file separately as one taxpayer might be eligible but the couple as a whole may not be eligible. In addition, it is important to evaluate the filing status of college age dependents to determine if they might meet the criteria to file independently and not be claimed as a dependent. This might allow them to receive the $1,800 in stimulus payments for 2020 that they might not have otherwise received.

Properly tracking and reporting the stimulus payments will help to alleviate future notices from the IRS. In addition, having a good understanding of how these stimulus payments are computed and the various phase outs could permit a taxpayer to maximize the potential amount that they could receive through adjusting filing status, who files independently, and timing of income. This situation is not limited to 2020 and will continue into 2021 as the stimulus payments continue.