What Is the Recovery Rebate Credit?
The COVID 19 pandemic has impacted our lives quite a bit. It has even changed our tax forms by adding a tax credit. The Recovery Rebate Credit was authorized by the CARES Act. Many of us received all or part of it in advance in the form of an Economic Impact Payment. And the Consolidated Appropriations Act passed in December of 2020 provided another Economic Impact Payment for many of us.
As of this writing, the 2020 1040 Form and Instructions are in draft form. A version that provides reconciliation for the second round of economic impact payments has not been provided yet. However, the IRS stated that 2020 tax returns will include a Recovery Rebate Credit that covers both economic impact payments. But what does this mean?
File Your Taxes if You Didn’t Receive Your Full Stimulus Payments
If you didn’t receive any of the economic impact payments you were entitled to, you will be able to reconcile that on your 2020 tax return. For example, if you should have received $1200 the first time and $600 the second time – but you didn’t – indicate that on your tax return. You should receive the payments as the recovery rebate credit in your tax refund. Or, if you would otherwise owe taxes, the IRS will apply the credit to your tax liability. If you added a child under 17 to your family in 2020 and didn’t previously get a payment credited for the child, you can capture that when you file your taxes.
The recovery rebate credit makes sure if you missed any portion of the economic impact payments, you can claim that by filing your taxes. If you are having a tax professional prepare your tax return, I encourage you to bring proof that you received any economic impact payments and the amounts. They will likely ask for it. For those of you who prepare your own tax returns on software the process should be seamless. The software will ask you if you received any economic payments and how much. The software will calculate if you should receive a recovery rebate credit based on what you entered about the payments and based on the individuals listed on your tax return.
Will I Have to Pay Back My Stimulus Check If I’m No Longer Eligible?
The IRS states there will be no “clawback” for the stimulus. If you received an economic impact payment based on a valid 2018 or 2019 tax return, but your 2020 tax return indicates you would have gotten less, you can keep the money. This has an interesting impact on parents who switch which parent claims a child each year. Consider this scenario: One parent received an economic impact payment for a child based on a 2019 tax return. The other parent claims the child for the 2020 tax return. In this case, the other parent will receive the recovery rebate credit on their 2020 tax return. Each parent can keep the payment or credit.
The economic impact payments and the recovery rebate credits are tax free. The economic impact payments will not reduce your tax refund. If you received these funds, I hope you have used or will use them to improve your financial position.