By Kari Springer, Esq.
The idea of sending checks directly to taxpayers is not a novel one. However, it is gaining widespread attention as the Coronavirus Aid, Relief, and Economic Security (CARES) Act, proposes to direct payments to individuals through the IRS under a newly revised Code section 6428.
Below is an overview of how the newly revised section 6428 works to provide direct payments to individuals in 2020 and the impact of those payments on future tax years.
How does it work?
The stimulus check is not counted as taxable income. Instead, it acts as a credit against 2020 income taxes. This is similar to the previous two iterations of section 6428 that we saw during the Economic Growth and Tax Relief Reconciliation Act in 2001, as well as the Economic Stimulus Act just before the 2008 recession.
In essence, the stimulus check acts as an advance of your 2020 income tax refund. This means when you prepare your 2020 income tax return, there will be a line to include the section 6428 credit. The credit on your 2020 return is subtracted by any amount received as a stimulus check in 2020. If the amount you received as a stimulus check is less than the credit you are due, the difference will be included as part of your 2020 refund. If you have been overpaid by receiving the stimulus check, however, you will not be required to return any excess amount.
Who gets the credit?
Any individual who is not a nonresident alien or a person who can be claimed as someone else’s dependent.
How much is the credit?
The credit is $1,200 per person or $2,400 for joint returns, plus $500 per dependent. The $500 is eligible for dependents only up to age 17.
How does my income affect the amount of the credit?
A tax credit “phases out” or shrinks beyond a specified income threshold. The phase-out of this credit begins with an Adjusted Gross Income (AGI) of $150,000 for joint filers, $112,500 for head of household filers, and $75,000 for single or married filing separately filers. The credit phases out entirely at $99,000 for single taxpayers with no children and $198,000 for joint taxpayers with no children.
How is the stimulus check calculated?
The IRS calculates the stimulus check as the amount that would have been due to you using your 2019 tax information. This will ultimately lead to a smaller stimulus check if your 2019 AGI is much higher than your 2020 AGI. On the other hand, this leads to a larger refund after filing your 2020 taxes if you received a lower check up front in 2019, as described in the example below.
Example: If a single filer with no children earned $250,000 of AGI in 2019, she would have phased out and not have been eligible for a stimulus check. However, if her 2020 tax return shows an AGI of only $50,000, she would be eligible for the full stimulus amount because she did not receive a stimulus check in 2020 and her AGI was not above the phase-out amount.
What if an individual did not file a 2019 return?
If an individual did not file a 2019 return, the IRS can substitute and use the 2018 AGI to calculate the stimulus amount. Furthermore, if an individual did not file a 2018 or 2019 return, the IRS may use information from social security statements to determine the appropriate stimulus amount. If an individual does not have income information from a 2018 tax return, 2019 tax return, or does not receive social security, it is unlikely that they will receive a stimulus check. However, section 6428 does not explicitly specify what would happen in this situation.
When will the stimulus checks be paid?
The new law does not set a specific date for payment. However, it does require that checks be sent out no later than December 31, 2020. If the newly revised section 6428 is consistent with the previous versions of section 6428, the stimulus checks will be mailed out on a rolling basis based on an individual’s Social Security Number over a period of months.
Kari Springer is an attorney at Gawthrop Greenwood, PC, where her practice includes Taxation and Trust and Estate Planning. If you have any questions about stimulus checks and your taxes, contact attorneys Stephen J. Olsen at firstname.lastname@example.org or Kari Springer at email@example.com.