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COVID-19, Tax & Assurance Guidance

Stimulus Checks and the Recovery Rebate Credit

Posted on January 28, 2021 by

Margaret Amsden

Margaret Amsden

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To combat the hardship presented by COVID-19, legislation was signed in late 2020 enabling many taxpayers to receive two rounds of “Stimulus Checks,” or “Economic Impact Payments” (EIPs) throughout the year.

EIP 1 vs. EIP 2

Learn about the differences between each EIP including dates and amounts.

EIP 1

  • Started being delivered beginning in April 2020
  • Taxpayers received up to $1,200 ($2,400 married filing jointly) plus $500 for each qualifying child they had in 2020, based on income level
  • Notice 1444 shows how much EIP 1 the taxpayer received

EIP 2

  • Started being delivered beginning in December 2020
  • Taxpayers received up to $600 ($1,200 married filing jointly) plus $600 for each qualifying child they had in 2020, based on income level
  • Notice 1444-B shows how much EIP 2 the taxpayer received

How Will EIPs Impact 2020 Tax Returns?

While there was some initial confusion when the law was first passed, the Internal Revenue Service (IRS) has now clarified how these EIPs will impact taxpayer’s 2020 tax returns:

  • The EIPs will not be considered taxable income
  • The EIPs are treated as an advanced refundable credit

Since the EIPs were made before year’s end, the IRS calculated each EIP based off the most recent tax return that had been filed (2018 or 2019). The amount of the EIP indicated on Notice 1444 and Notice 1444-B varied among taxpayers as the amount was determined using multiple factors including filing status, Adjusted Gross Income (AGI), and the number of Qualifying Children.

What Does the Recovery Rebate Credit Mean for Taxpayers?

Because the Recovery Rebate Credit serves as an advanced credit for the 2020 tax year but was based on prior year information, many taxpayers could find themselves in one of two situations based off the amounts received on Notice 1444 and 1444-B:

  • The taxpayer is owed an additional amount based off changes in life circumstances (i.e. birth of a child, lower AGI, filing status, etc.). Any additional amount owed to the taxpayer will be reflected on their 2020 income tax return as a “Recovery Rebate Credit” (RRC).
  • The taxpayer received the same amount in EIPs as the 2020 credit calculates or the taxpayer received more EIPs during 2020 than the credit calculates. The IRS has made it explicitly clear that the taxpayer will not owe any tax for this and will not be required to pay back the excess.

Do You Have to Claim Your Child as a Dependent?

The amount of EIP 1 and 2 or RRC varies based on whether a taxpayer claimed a “Qualifying Child” on their 2018, 2019, or 2020 Tax Return. The IRS defines a “qualifying child” following the same criteria as the Child Tax Credit governed under IRC Section 152. While there are certain rules and exceptions regarding what constitutes a “qualifying child”, the most important criteria is that the child must be under the age of 17.

Therefore, many students and children ages 17 and older who were claimed on their parent’s 2018 and/or 2019 tax returns will not receive an EIP 1 and/or EIP 2. While the technical rules surrounding claiming dependents who are 17 and older have not changed due to COVID-19, don’t simply assume that because you claimed your child last year, you must claim them this year. Many parents who claimed children who were 17 or older on their 2018 and/or 2019 tax return might not have to claim them as dependents for 2020, due to changes in life circumstances. Important considerations in determining if you must claim your child as a dependent are:

  • Child’s gross income
  • Child’s support
  • Student status

As such, many taxpayers could benefit by not claiming their child as a dependent. If the child qualifies to claim themselves, he or she could have the opportunity to receive $1,800 as a Recovery Rebate Credit by filing their own return.

Contact Us

If you have questions about EIPs or the RRC, or if you need help determining whether you must claim your child as a dependent on your 2020 tax return, we can help. For additional information call us at 248- 208-8860 or click here to contact us. We look forward to speaking with you soon.

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Margaret Amsden

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Margaret leads the firm’s private client services group as the point person for individual, estate and succession planning tax strategies.

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