COVID-19 Pandemic: US Stimulus Checks
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This will be the first in a series of posts to provide updated info about the stimulus checks that will be issued from the US Treasury Department.
Part of the CARES Act enacted by Congress and signed into law by the President on 27th March 2020 included a provision for 'Economic Stimulus Payments'.
The premise is simple enough, each taxpayer will receive a check from Uncle Sam for $1,200. Married people filing a joint return will get $2,400. People with 'qualified children' will get an extra $500 per dependent.
Simple, right?
Nothing with tax is simple. In normal times, I'd say that the "devil is in the details". These are not normal times. On top of the normal complexity is a shifting set of rules and a lack of definitive reliable information.
Let's start with the 'normal' complexity issues:
These checks are subject to an income limitation. The limitation is based off of the AGI (Adjusted Gross Income) that is reported on either the 2019 Form 1040, or the 2018 Form 1040 if 2019's return hasn't been filed yet.
The phaseouts are listed here, by filing status:
Single / MFS: $75,000 to $99,000
Head Of Household: $112,500 to $146,500
Married Joint: $150,000 to $198,000
Payments will be made via the means that your last refund was processed. If your refund was paid via direct deposit to your bank account, the stimulus payment will be sent to that account. If that account is closed, or you haven't received a refund for 2018 or 2019, then the government will mail a paper check to your address used on your most recently filed return.
People on social security that don't ordinarily file a return due to income limitations, will receive a payment through the social security system.
Here's where the complexity comes in:
Qualifying child means a child under the age of 17. For people with children who were 16 in 2018 but already filed a return in 2019 will not get the extra $500. Further, people with children over 17, who are either in college or disabled, will not get the extra $500.
People that are fully disabled and are dependents on their parent's return are neither eligible for a stimulus payment of their own, nor can their parents get a payment themselves for their child.
People that are between the ages of 17 and 24, and are in school for a degree seeking program, are also not eligible for a $1,200 payment, nor can their parents claim a $500 payment for their child.
It is possible that these children may be eligible to receive a $500 payment themselves if they filed their own return and showed earned income - but I'm not able to verify this. This is where the problem of reliable information is most apparent. The reason I wanted to address this is because it's important to determine what is fact, what is fiction, and what is not determined as of present.
[UPDATE - the IRS published guidance on this particular point and the answer is 'no', if one is a dependent, then it doesn't matter if they file their own return and have earned income; they are not eligible for any payment. Reason for leaving this sequence of writing in the post is to illustrate how information evolves over time.]
People on social security that are claimed as dependents on their adult child's return will still get their own stimulus payment, but their adult children will not be entitled to a $500 dependent payment.
Here's where the ugly comes in:
This is not a refund. This is a 'refundable credit, paid in advance of the current year's filing'. What this means is that a person's eligibility to receive a payment will ultimately be based on their 2020 tax filing. If a person receives a payment based on either their 2018 or 2019 filing, and after submitting their 2020 filing, that eligibility is either phased out due to income or a child turned 17, then some amount of the payment received will need to be repaid.
From a strict tax theory point of view, this doesn't mean that the payment itself is taxed; it is not taxed, nor is it taxable income. It is a payment based on certain criteria.
Everything above is meant as dispassionate observation. Here is my professional opinion on this: It's a shame that these payments, which are sorely needed by so many of our fellow Americans right now, are contingent on such arcane rules. Taxpayers shouldn't need to be experts in the Internal Revenue Code when accepting help from their government, but this is where we are.
And we're not done with the ugly.
These payments are not protected from garnishment by creditors, though they are protected against existing federal tax debts. What this means is that if you have an outstanding debt - whether you're aware of it or not - this payment could be attached and garnished by a creditor.
Some people in my network suggested that they change their method of payment with the IRS, i.e. if they elected to have a prior refund sent via direct deposit, they should request to have the check mailed instead.
This is not possible. The IRS simply doesn't have a mechanism to handle a request like this, and due to the virus, they are operating with less employees and simply don't have the capacity to manage this anyway.
This leaves such people with only one option. To close their existing bank account and open another one.
Granted, this isn't an issue that will apply to the majority of clients of our practice, but it is in the realm of possibility. If this issue doesn't apply to you, and I hope that it doesn't, at least you're sensitized to some of the difficulty faced by our fellow Americans.
For people who are divorced or separated yet filed a joint return with their now ex spouse, the stimulus payment will go to the bank account listed on the most recent return. For example, a couple files a joint return for 2018 and then gets divorced in 2019, but hasn't yet filed a 2019 return. In this case, one spouse will need to rely on the other spouse to send their 1/2 of the stimulus payment.
Be careful where you get your information from. We've heard reports of people being advised 'to file a simple tax return' for disabled adults so they'd qualify for a stimulus payment. Such articles, written by people that are not tax professionals, are essentially counseling tax fraud. If a person is not eligible for a payment under the law, then to file a return asserting that they are eligible is a crime.
[UPDATE: The IRS published guidance on the Economic Impact Payments here at this URL.]
Putting this in perspective:
While this money is not going to solve the gaping hole that the virus has hacked into our nation's economy, it will help a lot of people who are under pressure, at least for the short term. I can only hope that the government gets its act together and gets the funds out sooner than later. Every little bit helps.
Looking Ahead:
For those old enough to remember, this program should operate similar to the Bush '43 era stimulus checks. When you receive your stimulus payment, be sure to save some type of confirmation. A good example would be a bank statement or transaction register from an online account. We'll need to know how much was received under this program in order to prepare the 2020 tax return.
Thank you again for this opportunity to serve.
Stay safe and wash your hands.
Sincerely,
Jonathan Rivlin, CPA
President
The Rivlin Group PC
Disclaimer:
The purpose of this article is for informational/educational use only. No client relationship is intended by virtue of your use of this article. This article cannot be relied on for official advice regarding your specific situation, and is meant only to be general in nature. Because the regulatory environment is so dynamic at this time, it is possible that the content in this article will be superseded. This article was drafted on 12th April 2020.