I recently received an email from my tax preparer about the COVID stimulus payments, with the following language:
“The checks will be an advanced credit from the government towards your 2020 return”.
I am not a tax expert. What exactly does this mean? Someone mentioned to me that the stimulus payment was not really new money for us to keep, but that it would be taken back from the IRS next year as part of the 2020 tax process. Does that mean my 2020 tax bill will increase? Or my refund will decrease?
It’s a fully refundable credit, paid in advance. Which means: if you are owed a refund, it would be increased by $1,200. If you owe money, the amount you owe would be decreased by $1,200, and if that’s more than you actually owe, you would get a refund for the difference. But, for most people, this was paid in advance.
If you’ve already gotten the $1,200 payment, it will have no impact whatsoever on your 2020 taxes (you’ll probably just check a box saying you’ve already received it). If you have not gotten the $1,200 payment by the time you file your 2020 income taxes, you will be able to claim it then as a fully refundable tax credit.
This has confused a lot of people, because (1) income taxes can be pretty confusing to begin with, and (2) there have been stimulus payments in the past that were structured as advances on refunds. This one isn’t. It’s an extra $1,200.
But are you saying that the US government is anticipating so many delays in the payments that they are proactively telling people about income tax credits that would only take place 12 months from now? That doesn’t sound like a very effective way to stimulate the economy :smack:
Surely the payments have already been made? It’s just the accounting process that comes later. Although it’s extra money, perhaps the reason that it’s an element in the 2020 return is to verify that recipients should indeed have received them, and did receive them where due. They wanted to get these payments out in a hurry, so there may have been errors, or even cases where people have fraudulently cashed checks.
The payments were intended to be paid out as soon as possible, and most of them have been made, but it’s a big, complex process. If you were due a refund in 2019 or 2020, and filed, and chose to receive the refund via direct deposit, it was pretty simple to transfer the money to your bank account.
But quite a lot of people don’t fall into that category. Many didn’t file because their income was too low, or don’t have bank accounts to receive a direct deposit, or have moved, or have died, or their filing status has changed, or any of a number of other complications, or a combination thereof. The IRS has to try to physically track all of these people down and get them checks. They’re essentially trying to locate every single adult citizen and permanent resident in the U.S.
The stimulus check was formally structured as an advance payment of a fully refundable tax credit on 2020 income taxes because that was the simplest and quickest way to do that. The IRS already has the best infrastructure in place to carry out this kind of program. But no one, in the entire history of the country, has tried to carry out this kind of program on this kind of scale.
The payments were based upon an estimate of 2020 income, with the Fed using 2018 or 2019 tax returns. When you file your 2020 tax return it will get recalculated to your 2020 income. For example (using rough numbers for discussion and in no way are actual amounts), if your payment was calculated with 2018 income and it was say $50,000 you would have received a payment of $1,200. If your actual 2020 income is roughly the same, it will be a wash and no impact to your 2020 return. However, if you got a new job and your 2020 income is $100,000, you are no longer entitled to the tax credit and so you would need to repay the $1,200.
An example that many people are more familiar with is the tax credit for insurance (Obamacare) through a state exchange. You estimate your income (say $30,000) and are entitled to a tax credit of $6,000 ($500/month). You can then apply the $500 monthly credit against your monthly premium (say $800)and pay the difference ($800 - $500 = $300). When you file your actual tax return you will recalculate your tax credit based upon your actual income. If it is the same it will be a wash. But if your actual income is $40,000 you are no longer entitled to the full $6,000 and it may be only $5,000 and so you will need to repay the difference. Likewise, if your actual income is $25,000 you are entitled to a larger tax credit and it will be included on your 2020 return.
Also note, the tax credit is advanced based upon an estimate. Some people may not receive the advance payment ($1,200) and so when they calculate their 2020 return they will receive the correct amount they are due. When I first got insurance through the exchange I did not apply the credit to my monthly premium. I paid the full premium and got the tax credit on my return. I only did that the first year because my income was changing and I didn’t know how it would all work. Now that my income is steady I tax the advance credit against my monthly premiums.
People on this board have been repeating this misinformation since the CARES Act was first enacted into law. It was not true then, it never has been true, and it still continues not to be true.
I will once again post the actual language from the CARES Act:
Subsection (f) describes the advance payments being distributed in 2020.
Even though they are in parentheses, the key words here are “but not below zero.” This paragraph is saying that the advance payment you receive in 2020 will be subtracted from the credit you get when you file your 2020 return in 2021, but WILL NOT REDUCE THE CREDIT BELOW ZERO.
I know I have posted this before and it has been ignored before. I hope that some lurker at least will read it.