Six months ago or so, you likely received a payment from the government as part of the COVID-19 response. The payments were a result of the CARES Act and are considered a refundable tax credit for your 2020 tax return. So how does that affect your 2020 tax return? We'll get to that, but let's start with a refresher of the program.
Economic Impact Payment
As set up by the CARES Act, many taxpayers were given a refundable credit called the Economic Impact Payment (EIP). The amount was $1,200 per qualified individual. Married couples were authorized a total of $2,400. For each child dependent less than 17 as of 31 Dec 20, the parents are authorized an additional $500. There are no payments for dependents age 17 and older.
Eligibility for the payments phased out for individuals with and Adjusted Gross Income (AGI) greater than $75,000 and married couples with AGI greater than $150,000. For those filing as Head of Household, the phaseout starts at $112,500 AGI. The phase-out is 5% of the amount by which the AGI exceeds the threshold. The size of the phase-out range will depend on the number of dependents, if there are any.
The dollar amounts in the previous paragraph are for your 2020 income. But the money you received was based on your 2019 or 2018 income. That means you'll need to reconcile the difference on you 2020 tax return.
Reconciling Your 2020 Tax Return
You'll need to reconcile the difference, if any, between what you received and what you should have received. To start the process, you want the letter you received about 15 days after you received the payment (hopefully you saved it, not sure I did). If you don't have the information, check your bank records to see how much the deposit was. Look for an electronic payment from the IRS.
Once you have the deposit amount and your AGI, you can complete the worksheet in the Form 1040 Instructions to reconcile the differences. Most likely if you use tax software, you will only need to input the amount of the payment.
If you should have received more than what you did receive, you'll report that amount on Line 30 of the 1040. Since this is a credit, it will reduce your tax bill dollar for dollar. And since it is a refundable credit, you'll get the money even if you owe $0 taxes. What about if you got more than you should have? There is some good news here. You won't have to pay back the excess.
If your children were dependents age 17 or older in 2019 or 2018 (depending on the year the IRS used to make the payment), but they are not dependents in 2020, make sure they claim this credit.
Military Finances are Different
Military finances and taxes are as different from civilian finances as military life is from civilian life. We think you should work with a financial and tax advisor that lives and breathes them every day. Give us a call or use the button below if you like to chat.
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