Say they send me a nice stimulus check, and I receive it in the mail (a paper check, not direct deposit) on, say, Dec 28. But I don’t deposit it at an ATM until Jan 2. Is it 2020 income, or 2021 income? When does income “count?” When you physically receive the check, or when you cash/deposit it?
(Ain’t gonna say I’ll be sad to receive the money…)
Technically personal income tax works on a cash basis, so you should declare it when you receive it, even if you haven’t deposited it yet. That is what is known as constructive receipt–at that point it’s your money to with whatever you want, so it’s income at that point in time. However, if you get a check that late in the year, forget to check your mailbox for a couple of days, and deposit it in 2021, nobody is going to question whether it actually arrived in your mailbox in 2020.
In the case of these stimulus checks specifically, I thought these were considered non-taxable income. In fact, I thought these were considered as not being income at all, but rather a “refundable tax credit”. The confusing part had to do with what year they were in.
IIRC, that $1200 we all got earlier this year was to be considered a “refundable tax credit” for the 2021 tax year, just paid out well in advance. I guess this $600 will be likewise?
I assume, and expect, that there will be some specific line(s) on our 2020 or 2021 1040’s where these have to be declared. I suppose that there might be one line where you claim these tax credits, but another line where you confess that you’ve already received them.
ETA: To be sure, that last paragraph above is just semi-wild-ass guessery.
Here’s an article I just googled DuckDuckGoed up with a discussion. Yes, it’s a refundable tax credit.
Okay, I might be a bit confused on this detail. Maybe what I meant is that it’s a refundable tax credit for this tax year that you would normally have gotten next year after you file your 2020 1040, except they already paid it out to you way earlier than that instead.
I still envision that it must be accounted for somehow on your 2020 1040 that you will file in 2021.
I don’t guarantee the IRS will see it that way. I once received a check dated and I presume mailed on Dec 31. I didn’t get it until into the new year. The IRS insisted it was income for the earlier year. They billed me and told me I could file an amended return for the next year. I did. Because it was the year of my degree, my income in the earlier was quite a bit lower and I was in a lower tax bracket. I actually made out well on the deal. That’s probably why I remember it.
IANAA and I have not dealt with the IRS on this particular issue. As I said in my first post, the rules say that the day you have the check in your hand is the day it becomes income. But I don’t know how the IRS could insist that you received a check in December that you could not possibly have received in December.
Similarly, I’ve never been clear on the ‘where’ part for state income tax purposes. There was a short story I wrote when I was living in RI. But I never submitted it anywhere at that time. But later when I was staying for a summer in Connecticut I submitted it to an on-line anthology/contest, and won a lower prize. Which was paid to me via PayPal after I’d moved to MA. I have no idea where a website is considered to exist, though I later learned the editor/publisher lived in NY.
So if I were to report that as income, should it go under RI or CT or MA or NY or ??? (I didn’t report it anywhere. Bad me! But I figure no one’s going to come after me about a magnificent ten bucks.)
As discussed above, this particular check isn’t “income”.
But consider an employer who writes your paycheck to you on 12/29/20, mails it on 12/30/20, and you get it on 1/3/21. Which W-2 will that income be included in? 2020’s. Which is what year you’ll owe taxes on it.
The same applies to money received where you get a 1099 about it. They payer will account it based on the day they generate the check. Which evidence goes to IRS and forces you to follow suit.
I don’t know, but probably because there’s a 1099 which will identify the year of the payment.
Yes. At least the last one wasnt taxable.
OP, you are a “Cash Basis Taxpayer”, so it is taxable when received. Since the govt doesnt know exactly when you got the check (but they do know when deposited or cashed) , I suppose you could argue it was a couple days later. But in general, it is taxable for the year you get the 1099 or W2. Which you likely wont get for the stimulus check, unless they changed it.
You could have gone to Appeals and won, but as you said, it worked out for you.
Although not directly on point, a while ago I was looking into when a “gift” is completed (for tax purposes) and stumbled across Metzger v. Commissioner (link) a 1994 case from the 4th Circuit (where I live).
The taxpayer had made gifts to his children – check issued December 14, deposited (by the giftees) at the bank on December 31, and the money left the giftor’s account on January 2. The taxpayer then made additional gifts after January 1 (and then soon died). The question was whether these were two sets of gifts made in Tax Year 1 and Tax Year 2 (thus exempt from the gift tax return requirement) or two gifts made in Tax Year 2 (thus exceeding the exclusion).
The legal question was whether the gifts should be viewed a completed when (1) the check was given to the giftee; (2) when the giftee deposited the check at the bank; or (3) the funds left the giftor’s account. The court applied Maryland law to conclude that the presentment of a check was a “conditional” gift that was not completed until the giftee presents the check for payment and the check is “accepted” by the giftor’s bank. So, under Maryland law, the gift was not completed until January 2.
But, the court then discussed a “relation-bank” doctrine (applicable to charitable contributions) that allows donations initiated (but not completed) in a year to be attributable to that year (i.e., the donation “relates” back to the presentment of the check). The Metzger Court applied the doctrine to situations “where noncharitable gifts are deposited at the end of December and presented for payment shortly after their delivery but are not honored by the drawee bank until after the New Year’s holiday” and concluded that it relates back to the “date of deposit” (so option 2 above).
I don’t know much about tax law, and I am willing to assume that it would treat income differently from gifts. But it seems like there are some scenarios where the date of deposit (or the date of acceptance) would dictate when the transfer was complete.
Thank you all for the answers, especially the clarification on what the check really is. I had thought it was just “income,” a gift from our public servants in Washingtub. Ah, well, life couldn’t be that simple!
Interesting. IANA(tax)lawyer, but I did have a course on it in law school, which means I know enough to be dangerous, so take it as you will.
I seem to remember that income is earned when it is in your possession with the ability to control it. Under that theory, it would seem that once I have a check in hand, I have income (as I can cash it, deposit it, sell it to another, etc.) because the check is a commercial paper that has value.
If my understanding is correct, it is odd that the Fourth Circuit would apply Maryland property law to a federal income tax scheme. It is answering one question by applying the rules to answer a different question. The “date of deposit” is especially odd as I may never deposit a check. I might cash it or transfer it to a third party, or simply hold it until it is tax beneficial to me.
The court assumes that “when a transfer takes place” is a question of state law. It cites to a 10th Circuit case with similar facts that says so. That case cites to a late-1920s Supreme Court case on oil & gas leases that I don’t begin to understand, but seems to say that the existence of your property interest is determined by state law, and the tax consequences of same is determined by federal law.
The idea is that the presentment of the check is a conditional gift. And the gift is not accepted until deposited (or, I suppose, you endorse it to someone else). So the date of deposit seems right – you didn’t accept the gift until then so it’s not complete.
Because the issuer of the check sent a 1099-something to the IRS for the previous year?
This should prove interesting for us since we file single. Mrs Cad was under the threshold last year (due to being out of work) but is above the threshold for 2020. For me it is the opposite. I made a lot more in 2019 working two jobs so I was considered rich but made a lot less in 2020. If I’m reading the law correctly I will get a stimulus tax credit when I file but MC will have to pay some of hers back with her taxes.
But the state law rules of a gift is (or at least can be) different than federal income tax law. I can hold a check and consider it as my income as I can hold it over to a new year. Again, I don’t have cites because I’m considerably lazy off the clock, but if I tell my boss to keep my paycheck, just donate it to charity, that is still income for tax purposes because I had control over it enough to tell the boss to do that. Maybe after the new year, I’ll have some motivation to look, but I’m pretty sure that is correct.
Do some research before you think you’re sure of that. If I read and remember aright (from way back when this was first in the news), MC might not have to pay any of that back. One might get an excess amount of stimulus money in the circumstances you describe, and I think the rule was that you get to keep it all.
Better double-triple check to be sure, but that’s what I think I understood.
ETA: Paul Krugman recently argued that these “stimulus” payments would be better understood as disaster relief rather than economic stimulus, with some relevant implications, because . . . reasons. I’ll post a link if I can find it again.