The CARES Act provides a one-time direct “rebate” payment to individuals and families. These payments are considered advances for a new federal income tax credit subject to phaseout thresholds based on adjusted gross income (AGI). The credit is equal to $1,200 ($2,400 for eligible individuals filing a joint return) plus $500 for each qualifying child of the taxpayer. Here we look at some questions surrounding this rebate/credit provided by the federal government.
Am I eligible for this credit?
For the credit, an “eligible individual” is any individual other than a nonresident alien or an individual for whom a dependency deduction is allowable to another taxpayer for the tax year.
Children who can be claimed as dependents by their parents aren’t eligible individuals, even if they have enough income to have to file a return. It makes no difference if the parent chooses not to claim the child as a dependent, because the dependency deduction is still “allowable” to the parent.
Individuals who have no income, as well as those whose income comes entirely from non-taxable means-tested benefit programs such as SSI benefits, are eligible for the credit and the advance rebate.
An individual who wasn’t an eligible individual for 2019 may become one for 2020, for example, where the individual was a dependent for 2019 but not for 2020. The IRS won’t send an advance rebate to such an individual, because advance rebates are generally based on information on the 2019 return. However, the individual will be able to claim the credit when filing the 2020 return.
How is my AGI Determined?
If you have filed your 2019 income tax return, the IRS will use this data to determine eligibility. If an individual hasn’t yet filed a 2019 income tax return, IRS will determine the amount of the rebate using information from the taxpayer’s 2018 return. If no 2018 return has been filed, IRS will use information from the individual’s 2019 Form SSA-1099, Social Security Benefit Statement, or Form RRB-1099, Social Security Equivalent Benefit Statement to determine eligibility.
How does the AGI Phase Out Work?
The credit amount is reduced by 5% of the taxpayer’s AGI in excess of: $150,000 for a joint return, $112,500 for a head of household, and $75,000 for all other taxpayers.
The credit is completely phased-out for a single filer with AGI exceeding $99,000 and for joint filers with no children with AGI exceeding $198,000. For a head of household with one child, the credit is completely phased out when AGI exceeds $146,500.
How are they defining “qualifying child” for the additional $500 credit?
A “qualifying child” means a qualifying child of the taxpayer who hasn’t attained age 17. Children who are (or can be) claimed as dependents by their parents aren’t eligible individuals, even if they have enough income to have to file a return. It makes no difference if the parent chooses not to claim the child as a dependent, because the dependency deduction is still “allowable” to the parent.
How do I receive this rebate?
Most eligible individuals won’t have to take any action to receive an advance rebate from IRS. The IRS may make the rebate electronically to any account to which the payee authorized, on or after January 1, 2018, the delivery of a refund of federal taxes or of a federal payment.
No later than 15 days after distributing a rebate payment, IRS must mail a notice to the taxpayer’s last known address indicating how the payment was made, the amount of the payment, and a phone number for reporting any failure to receive the payment to IRS.
No advance rebate will be made or allowed after December 31, 2020.
If you have questions about the tax credit, Selden Fox can help. For additional information please call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.