Stimulus Checks And Filing Your 2020 Tax Return-Hurry Up Or Wait?

The American Rescue Plan Act of 2021, “the Biden stimulus package” is not law, as I write this. It seems very likely to pass though and some people may want to take action in anticipation of it. That would be filing your 2020 federal income tax return immediately. Others may want to put off filing that return even if it is ready to go and they are itching to pull the trigger.

I generally don’t make recommendations based on legislation that has not yet passed, but the circumstances here are a little peculiar. Regardless, there can be no harm and probably some good in pulling together your filing information now even if you decide to put off filing.

Recovery Rebate To Individuals

The part of the American Rescue Plan Act of 2021 that affects when to file your 2020 return is Section 9601 2021 Recovery Rebates to Individuals on Page 454.

The recovery rebate is framed as a refundable credit against your 2021 tax, which seems to lessen the urgency around it. The credit is $1,400 ($2,800 for a joint return) plus $1,400 times the number of dependents. The credit is phased out based on adjusted gross income beginning at $75,000 going to zero at $100,000 (Double those numbers for joint returns. It is $112,500 to $150,000 for head of household.)

Timing Of Your 2020 Return

What creates the urgency around filing is that the credit will be refunded in advance. It will be trued up on your 2021 return by a reduction for the advance payment, but the reduction does not reduce the credit below zero. So if you get an advance refund of the credit, which some of us would refer to as a stimulus check, you don’t have to pay it back if your 2021 income ends up being over the threshold.

So how are the advance payments computed ? They are figured by applying the rules to your 2019 return unless you have already filed your 2020 return. Then they use your 2020 return. This is what creates the urgency. To take a really simple example. Robin who is single has consistently had a six-figure income, but was thrown out of whack by the plague. Robin is now back on track and expects to do as well in 2021 as they did in 2019.

Robin would not have received a stimulus check in 2020, but will get a credit on their 2020 return to make up for that. If Robin waits to file their 2020 return, at least initially they will not get anything when checks go out, optimistically sometime in March, since the determination will be based on their 2019 return. There will be another round of checks based on the “additional determination date” for people who file before the earlier of 90 days after the due date (currently April 15) or September 1.  That eases the pressure a bit, but I would just as soon get the money in the first round of checks. Robin won’t be able to claim the credit on their 2021 return. Here is another critical piece:

Solely for purposes of this subsection, a return of tax shall not be treated as filed until such return has been processed by the Internal Revenue Service.

So just forget about paper filing. What I don’t know is what the lag is, if any, on processing when you file electronically. That is the argument for quick action by those who benefit from having a 2020 return in.

On the other hand consider Terry who did much better financially in 2020 than in 2019. It happened. Really. Terry does not want their 2020 return to have been processed when the checks go out. Terry wants a check based on their 2019 return.

What About Those Dependents?

But that is not all. What about dependents? Consider Blinn and Ashley who each make less than $75k. They are divorced and as is common alternate claiming little Kyle. It was Blinn’s turn in 2019. So Blinn is in no hurry to file, but Ashley is. So will little Kyle yield $1,400 to each of their parents?

When it came to the $500 per child Economic Impact Payment Kyle actually was a twofer. Blinn got $500 in the stimulus check and according to this information from IRS Ashley should be getting $500 on their 2020 return.

Or, for example, you received $500 for your child whom you claimed on your 2018 or 2019 tax return. You do not claim the child on your 2020 tax return because the child’s other parent claims the child. You will not be required to pay back the $500 even if the child’s other parent claims $500 for the same child on his or her 2020 tax return.

It is not supposed to work that way this time around. The bill calls for regulations or guidance to ensure that to the “maximum extent administratively practicable”:

…an individual is not taken into account more than once, including by different taxpayers and including by reason of a change in joint return status or dependent status between the taxable year for which an advance refund amount is determined and the taxable year for which a credit under subsection (a) is determined

Let’s imagine that Blinn and Ashley are both having a really hard time. So Kyle has moved in with Blinn’s parents at the beginning of 2021. Ashley rushes the 2020 return that claims Kyle. Mechanically Blinn and Ashley each get $1,400 for Kyle in their checks and the grandparents will get $1,400 on their 2021 return. We will have to wait and see how “administratively practicable” it is for the IRS to unscramble that egg.

It is possible that if Ashley does not rush, the IRS will have its act enough together to deny them Kyle in the second round of checks.

Some Practical Points

The bill really drills into you that you are not getting nothing for nobody without reporting a “valid identification number”, generally a social security number, for that person. And don’t forget that a non-custodial parent needs to have Form 8332 to claim a dependent. I’ve written a lot about how non-custodial parents without Form 8332 fare in Tax Court. It’s not pretty. I predict that there will be quite a bit of litigation coming on all this in the coming years.

Why It Is So Confusing

What makes it confusing is that the actual credit is determined on the 2021 return. There is a true-up then with the advance payment, but the true-up only goes one way i.e. in favor of the taxpayer. You can come out ahead if you get an advance payment that is more than the 2021 credit. And that payment can be affected by when you file your return. Then throw in that the payment can be based on either a 2019 or 2020 return and that a dependent can be on a different return in each of the three years.

Survey Says

I sought the wisdom of the #TaxTwitter crowd on this one. Not a big response, but it is worth considering.