Real Easy Tax Question -- When Does Income Count?

What happens to people who weren’t receiving a refund of at least $1200?

Paul Krugman’s essay on the subject: He argues that Congress should be focusing on disaster relief rather than economic stimulus, which puts the focus and desired kinds of benefits a little differently.

December 11, 2020: Paul Krugman: Trump tries to kill COVID relief.

Not sure what you’re asking here. It’s a refundable tax credit. That means, assuming you’re eligible for the full $1200:

  • If your refund would otherwise be, say, $1250, you get that plus another $1200 for a total of $2450.
  • If your refund would otherwise be, say, $1150, you get that plus another $1200 for a total of $2350.
  • If you owe tax of, say, $200, you will instead get a refund of $1000.
  • If you owe tax of exactly $1200, you will instead owe nothing.
  • If you owe tax of, say, $1400, you will instead have to pay only $200.

I’m not exactly sure if these examples answer what you are asking.

ETA: Some people who were eligible for that $1200 stimulus payment, due to some screwup, didn’t get it this past year. They can still claim the credit when they file their 2020 1040, and they’ll get the money whenever they get the money. In the meantime, I guess they were just supposed to hang tight and go hungry these last eight months.

The stimulus was a law that said that the government will treat you as having paid some additional amount of money into the government for taxes based on your income, and then provided that it should be refunded immediately instead of when you went to file your return. So it’s a refundable tax credit that most people got quickly, but some didn’t for various reasons, usually because they weren’t eligible based on their last filed return. There is a place on the 2020 1040, line 30, to claim the credit if you are eligible and didn’t get it. You can find a worksheet in the instructions of the 2020 1040 to work out what you should claim on your return. You do not have to repay it if you’re not eligible based on 2020 information but already received it. For married couples filing jointly, only the combined income matters. If you are filing separately, then it’s calculated separately.

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The actual OP’s question is actually not “real easy”. Perhaps it should be, but it’s complicated.

Income is considered received (on the cash basis) when it has been separated out for the recipient and the recipient is able to access it. This can be before the recipient knows that he has the income, in the case of receiving a check in the mail on 12/31 and not retrieving the envelope from the mail box. If the IRS believes that you could have theoretically cashed the check, they will say it belongs in the previous year, but you can go to appeals and try to get them to feel like it’s not worth litigating, or end up litigating it in Tax Court if you can’t agree. That’s probably what happened in the case OldGuy mentions; the IRS simply didn’t have any evidence that you didn’t receive it in the second year, and so will make the claim that it’s in the first year. Their auditors are probably trained to get it included in the soonest year if at all possible since that’s usually a win in terms of time value of money, but sometimes it can backfire.

If you received a 1099 that included income that was dated in the payer’s system as being in the first year but you could not possibly have gotten access to it until the second year, get what evidence you can for that assertion and leave it off your Schedule C or whatever until the second year. If the IRS says you didn’t report enough income for the first year based on the 1099, you can argue constructive receipt rules. If your evidence is good enough they’ll drop it; they obviously can’t know about the receipt issues when the payer files the 1099 but they have automated systems that will look for income understatements and will automate a proposed change to your return, sending you a letter demanding money but stating you can disagree and telling you how to settle the issue.

I suspect the same is true for W-2 wages, but it’s probably much less likely to be an issue, especially with most everything being direct deposit.

That was my point. So it seems not to matter when I deposit a check or the funds leave the check writer’s account. If I have a check in hand, that is income to me because I can control the money in the way I choose. I can deposit it (whether I do or not is my choice). I can assign it to another party. I can cash it.

Therefore, the government considers it to be income as soon as I am able to control it, not when these other things happen.

Aside: What happens when you receive, and can presumably control, a large stash of money through some accounting error that is not legitimately yours to use? Can you be stuck paying tax on that “income”?

I had something like that almost happen to me. It was 40-some years ago so I don’t remember all the details. I had an investment account. Suddenly one month, my monthly statement included an added investment of some $25,000 that certainly was a mistake. I reported it at once, but took many months – well into the following year – before the investment company fixed it by taking the money back out. During which time, the account was also accumulating extra value from all that money.

Because the money was still in my account at year-end, it was reported to the IRS (or more specifically, all the earnings were reported) on the 1099 form.

As best I can remember, I chose to NOT report any of that on my tax return. Eventually the company took the money out of the account, including whatever extra amount that money had earned. I don’t remember getting any kind of flak from the IRS about it.

ETA: What happens if you’re at the cash register in a supermarket, and the cashier walks away from the register to get a roll of quarters from the back office, leaving the cash drawer hanging open? (Yes, it happened once while I was there.) If a supervisor had seen that, the cashier would certainly have been fired on the spot! Meanwhile, I could certainly have scooped up all the money from the drawer and run off with it.

Was that money taxable income for me because I potentially had physical control of it, whether I chose to steal it or not?

I would think almost certainly not. If that was income why am I not required to report all of the money in the local bank as income because I could go rob it if I chose to.

You might control that $25K temporarily in the practical sense, but you don’t control it in any legal sense. You taking any action with that money would be “conversion” at minimum, and more likely theft.

As you said about the open cash drawer, the fact you had the opportunity to commit a crime doesn’t mean you did commit a crime, nor did you have “income” from the crime you didn’t commit.

Like many things in law, there’s a certain amount of reasonable assumption built into the terminology. When some statute says “it’s taxable to you when you get control”, that’s implictly saying “… when you get legal control”.

Every statute does not have to fully recapitulate all the law back to the definition of a court in order to still be subject to all of the law(s) that pertain.

I work for the IRS, but admittedly a lot of this is a bit outside my scope.

However, what I do know…

The EIP payments are non-taxable. I don’t know how they’re handling reporting that, income, but I assume there will be some sort of documentation and reporting expected. (I think the intent is that if you are entitled to the payments but didn’t get one, the amount will count toward taxes paid, and may result in an equal increase in refund or cut in taxes owed. But that’s just a guess.)

As for when it counts? It counts when the payment is issued to you, regardless of when you cash the check, or really even when you receive it. Just like if you get a paycheck from work and hold on to it, the income you report will be from your W2s and it will certainly be recorded there.

Now here’s my next guesswork: Since the bill was signed before the end of the year, I’m guessing that it means that all these payments will be credited to you 2020 tax reporting, regardless of when you get them. If I hear anything different I’ll try to get back here and let you know.

Thank you kindly! It accords neatly with other posts above, and it’s good to hear from someone inside the belly of the beast, so to speak. But, yeah, if you learn something new, pop back and let us know. I’m comforted to know it isn’t “taxable income.” I wish it were “just a gift.” I haven’t decided whether to go to an accountant this year, or try doing my own return, and stuff like this is why I’m scared to fly solo!

Okay, just doing a little reading, and I came across the first correction. LOL

It looks like the “official payment date” for this round is 1/4/21, regardless of when you get it. If that’s true, this second payment won’t be reported until the following year, even if you got it before 2020 ended.

…again, if I come up with more info I’ll pass it along.

Oh, man. Why do I do this to myself?

Okay, apparently you will be reporting both payments on your tax forms this year. It will be called Recovery Rebate Credit (or RRC). I was right, though, that if you’re entitled to a payment and didn’t receive it, you can claim it on your personal tax return.

Rest assured every American will have this issue. So every tax prep software suite will handle it with monkey-see-monkey-do handholding simplicity. An there will be hundreds of web articles on tax help & investor information websites explaining the correct procedures, the new spots on the new tax forms to report the payments, etc.

If you did your own taxes successfully last year, whether by hand or by tax prep software, you can certainly do them successfully this year.