Tax & AccountingJanuary 28, 2021

Accounting for EIPs and Recovery Rebate Credits on 2020 Tax Returns

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Accounting for EIPs and Recovery Rebate Credits on 2020 Tax Returns

The economic stimulus provided by the 2020 Recovery Rebate Credits is not over yet. Many eligible individuals may receive additional refunds of the credits, but only if they file tax returns for 2020.

2020 Recovery Rebate Credits and EIPs in 2020

The Recovery Rebate Credits are part of two legislative responses to the COVID-19 coronavirus epidemic.

  • The first credit is a maximum of $1,200 for each eligible individual, plus $500 for each qualified child.
  • The second credit is a maximum of $600 for each eligible individual and qualifying child.

Eligible individuals include virtually everyone except dependents, nonresident aliens, and people without valid social security numbers. However, both credits phase out for higher-income taxpayers.

The credits provided immediate stimulus in the form of advance refunds, or Economic Impact Payments (EIPs) that were distributed during 2020 and early 2021. The IRS used information from tax returns and government benefit payments for 2019 and 2018 to determine if a person was eligible for an EIP and, if so, how much it should be.

Recovery Rebate Credits on 2020 Returns

Although EIPs were generally based on 2019 and 2018 information, the Recovery Rebate Credits actually apply to the 2020 tax year. Thus, they must be reflected on 2020 tax returns.

Any Recovery Rebate Credit claimed on a 2020 return must be reduced by the amount of EIPs the taxpayer received. Spouses whose EIPs were based on a joint return are each treated as receiving half of their EIPs.

For most taxpayers, reconciling the EIPs and the 2020 credits will be pretty painless, because the EIPs will simply cancel out the credits.

Example: Sue is an unmarried taxpayer without children whose 2019 income was below the phase-out threshold. She received the maximum EIPs of $1,200 and $600. Unless her situation in 2020 changed, her Recovery Rebate credits for 2020 are also $1,200 and $600, minus the EIPs she received. Thus, her Recovery Rebate Credits on her 2020 return are zero.

Recovery Rebate Credits When 2020 Circumstances Differ from 2019

But what if Sue’s situation in 2020 did change? If that change entitles her to a larger credit, she can claim the difference as a refundable credit on her 2020 return. But if her new circumstances entitle her to a smaller credit, she does not have to repay any of her EIPs. It is literally a win-win situation for taxpayers.

Example: Sue had a baby in 2020. On her 2020 return, she is entitled to total Recovery Rebate Credits of $2,900 — $1,200 plus $600 for herself, and $500 plus $600 for her baby. On her 2020 return, she reduces this amount by her $1,800 EIPs. Thus, she can claim a refundable credit of $1,100 on her 2020 return.

Example: Sam received $2,900 in EIPs, the maximum allowed for himself and his daughter, Pam, was his qualifying child on his 2019 tax return. Pam turned 17 in 2020, so she is no longer his qualifying child. Sam’s EIPs reduce his Recovery Rebate credits on his 2020 return below zero ($1,800 credits for himself on his 2020 return minus $2,900 EIPs), but he does not have to repay any of his EIPs.

If Pam is no longer Sam’s dependent in 2020, she can also claim $1,800 in refundable Recovery Rebate Credits on her own 2020 tax return (assuming her income is below the phase-out threshold), even though Sam received $1,100 in EIPs for her as a qualifying child.

Other Things Can Cause EIPS and Credits to Differ

Other things that might cause a taxpayer’s credits on a 2020 return to differ from the taxpayer’s EIPs include:

Death might also result in a higher credit on a 2020 return. Eligible individuals who died in 2020 were not entitled to EIPs, but they are entitled to the Recovery Rebate Credits on their 2020 return.

Reconciling EIPs and Recovery Rebate Credits on 2020 Returns

Eligible individuals who received EIPs also should have received two letters from the IRS, Notice 1444 and Notice 1444-B, that detailed the amount and distribution method for their EIPs. Individuals who aren’t sure how much they received in EIPS may go to IRS.gov/Account for information.

The instructions for Form 1040 and Form 1040-SR include a worksheet for reconciling EIPs with the credit claimed for 2020. If the worksheet results in combined credits of zero or less, the taxpayer’s credit on line 30 is zero. However, if the worksheet produces a positive number, the taxpayer claims it as a refundable credit.

Nonfilers Should Become Filers for 2020

Eligible individuals who do not normally file returns should consider filing returns for 2020 – especially if they did not receive the maximum EIPs. The Recovery Rebate Credits on a 2020 return cannot increase tax liability or decrease the amount of a refund. At worst, they are neutral and, at best, they can put money in the taxpayer’s pocket.

Example: Pam was her father’s dependent in 2019, but is independent in 2020. Her income is below the filing threshold, so she does not have to file a 2020 return. However, if she does file, she is entitled to a fully refundable $1,800 credit — $1,200 for the first credit, and $600 for the second. This is the case even if her father received EIPs based on her status as his dependent in 2019.

The IRS also used information from a variety of government agencies to send EIPs to nonfilers. However, many individuals who qualify for the credits did not receive EIPs, or received less than they should have. These individuals in particular should file 2020 returns to take full advantage of the credits.

Example: Bob is a retiree who does not normally file returns because his income is below the filing threshold. Based on information about his Social Security benefits, the IRS sent him a $1,200 first-round EIP and a $600 second-round EIP. However, Bob is also raising two grandchildren who are his qualifying children for 2020. He should file a return to claim the additional $1,100 in refundable Recovery Rebate Credits for each of the children.

By Kelley Wolf, J.D., LL.M.

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