Tax Tips: IRS Guidance on Economic Impact Payments and the Recovery Rebate Credit
The IRS has updated its website to include more detailed guidance around Economic Impact Payments and the Recovery Rebate Credit to assist taxpayers filing their 2020 income tax returns.
Economic Impact Payments were provided under the Coronavirus Aid, Relief, and Economic Securities Act (CARES Act.) These payments were an advance payment of the Recovery Rebate Credit but may not represent the full amount a taxpayer is eligible to receive due to how such payments were calculated.
Generally, taxpayers who received the full amount of each Economic Impact Payment (EIP) won’t need to claim the Recovery Rebate Credit (RRC) or include any related information on their 2020 tax return. However, taxpayers who didn’t receive an EIP, or got less than the full amount, will have to file a 2020 tax return to claim the RRC.
EIPs were based on a taxpayer’s 2018 and 2019 tax year information. The RRC is similar except that the eligibility and amount are based on 2020 information included on a taxpayer’s 2020 return.
This means taxpayers who received less than the full amount of the EIPs because their 2018 or 2019 income was too high may be eligible for the RRC if their 2020 was lower than what was reported in previous years.
Another factor that could result in eligibility for the RRC is the birth or adoption of a child in 2020. A child under the age of 17 at the end of 2020 will be considered a qualifying child.
Dependency status could also result in eligibility for the RRC. If a taxpayer qualified as a dependent on someone else’s return in 2018 or 2019, but no longer meets the criteria in 2020, such individual may be eligible for the RRC.
Calculating the credit
The updated IRS guidance addresses other situations that may alter the amount of the RRC. This includes changes related to deceased spouse and filing status, delayed receipt of child support and administrative issues tied to being a federal benefits recipient.
The RRC worksheet included in the instructions for Form 1040 is also listed as a resource.
Claiming the credit
The IRS website states that the fastest and most accurate way to claim the credit is through electronic filing.
It is also important to note that a taxpayer who needs an extension to file their 2020 tax return can still claim the RRC. The extension to file request should be submitted by April 15, 2021, along with any taxes the taxpayer owes.
The IRS guidance clarifies that claiming the RRC should not delay the processing of the taxpayer’s return as long as the correct amount is listed. However, if there are errors in the amount claimed, the payment may be delayed while the IRS makes the appropriate corrections.
Receiving the Credit
If the taxpayer is eligible for a refund, the RRC amount will be included in the taxpayer’s 2020 refund payment. The RRC will not be issued separately from the refund payment.
Taxpayers can check the status of their refund through the IRS website. Refund payments are generally issued within 3 weeks of an electronically filed return. If the return is sent by mail, the refund may take up to 8 weeks.
Note that the CARES Act stated that EIPs could not offset back taxes, but an overpayment of a taxpayer’s 2020 income tax liability, including the RRC, can be applied to such amounts.
Taxpayers with additional questions about their EIPs or RRC can find the relevant guidance here.
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Tara Fisher has been practicing tax for over 20 years. Her professional background includes working for the U.S. Congress Joint Committee on Taxation, the national tax practice of PricewaterhouseCoopers, the University of Pittsburgh, and American University in Washington D.C. She is a licensed CPA and holds both an undergraduate and graduate degree in accounting from the University of Virginia.
The content contained in this article is for informational purposes only and is not tax advice. You should consult a tax advisor for advice applicable to your situation.