Did you receive a stimulus payment in 2020, or are you wondering if you should have? Perhaps you’re curious about how your stimulus payment will affect, or be affected by, your 2020 tax return. Maybe you had a significant change in income this past year, due to unemployment or waived RMDs, and would like to understand if you are eligible to claim a check from the IRS. There’s a lot of information circulating regarding this topic, and we’re here to help you sort through it.
Who was eligible to receive stimulus payments?
The CARES Act, passed in March of 2020, was a $2.2 trillion economic stimulus bill in response to the economic challenges resulting from the COVID-19 pandemic. The act provided emergency relief to various segments of the economy, setting aside approximately $293 billion for individuals in the form of direct payments[i]. Under the bill, individuals who are U.S. citizens or U.S. resident aliens, have a Social Security number valid for employment, and are not dependents of another taxpayer, were eligible for up to $1,200 if they had an adjusted gross income (AGI) below the following thresholds[ii]:
For each qualifying child, the payment increases by $500 and the threshold above increases by $10,000. Therefore, a couple filing jointly with one qualifying child would have received up to $2,900 ($2,400 for each individual, and $500 for the child), depending on their AGI.
The second stimulus bill was passed in December of 2020, and it included smaller payments to individuals of up to $600, plus $600 for each qualifying child. The AGI thresholds were reduced slightly for the second round of payments, as noted below[iii]:
Is the stimulus payment considered taxable income?
No, any stimulus payment you received is not considered taxable income. You will not have to pay taxes on this amount, and it will not affect your AGI when you file your 2020 tax return.
What happens if my income changed in 2020?
Adjusted gross income (AGI) was a key component in determining eligibility for stimulus payments, and it was based on the latest tax return filed. The 2019 return was used for most individuals, but if unavailable, the 2018 return was referenced instead. Because stimulus payments were based on pre-pandemic tax returns, any changes in 2020 could affect your eligibility.
If your income was reduced in 2020 and it now falls within the thresholds mentioned above, you may be entitled to claim a stimulus check when you file your 2020 tax return. On the other hand, if your income increased in 2020 and you received stimulus payments based on income reported on previous tax returns, you will not be required to return the payment or pay taxes on the stimulus income. Other changes to your tax return, such as updates to your dependents and changes in marital status, can also impact your eligibility.
What happens if I was a dependent in previous years, but became financially independent in 2020?
Under the eligibility requirements for stimulus payments, dependents over the age of 16 were ineligible to receive a payment. The person(s) claiming the dependents also did not receive funds on their behalf like they would have for younger children. If you are an individual who was claimed as a dependent in 2019, but became financially independent in 2020, you may be eligible to claim your stimulus check when you file your 2020 taxes.
If I waived my 2020 RMDs, could I be eligible for a payment?
Required minimum distributions were waived in 2020 to avoid individuals from having to withdraw funds from their retirement accounts during a market decline. If you opted not to make a distribution last year, your AGI likely decreased from previous years. So, in theory, you might be eligible to claim a stimulus payment. However, if you supplement your income from other sources, this might not be the case. Keep in mind that, as Rachel Roth explained in her recent article, RMDs have resumed in 2021.
So how can I claim a missing payment?
If you didn’t receive a stimulus payment but are eligible based on the above criteria, if the payment amount you received was lower than it should have been, or if a payment simply went missing, you must file a 2020 tax return and claim a Recovery Rebate Credit. Instructions on how to claim the credit are included in Form 1040.
Will my 2020 tax return affect additional stimulus payments in 2021?
The third round of stimulus payments is currently being discussed as part of President Biden’s proposed $1.9 trillion stimulus package. While details are being negotiated, it is possible that 2020 tax returns will be used to distribute stimulus payments in 2021. It is therefore of utmost importance that your 2020 tax returns be filed in a timely fashion to ensure the accuracy of any future stimulus payments.
Final thoughts
You hear it over and over again: 2020 was an unprecedented year. As you prepare to file your 2020 taxes, you may have unprecedented questions. Do not hesitate to reach out to us to get your questions answered. As a subsidiary of Maxwell Locke & Ritter, we can readily coordinate our wealth management services in Austin with their accounting services to address tax issues and any individual and business accounting needs.
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[i] https://www.crfb.org/blogs/whats-2-trillion-coronavirus-relief-package
[ii] https://www.irs.gov/newsroom/economic-impact-payment-information-center-topic-a-eip-eligibility
[iii] https://www.irs.gov/coronavirus/second-eip-faqs#Eligibility
