Why is the Federal Government Sending Everyone Money

Have you heard? You likely have, the government is sending everyone cash. It is technically being called an “economic impact payment” but before we dive into the details, why did Congress decide to make direct payments to Americans? On Monday March 30th the United States confirmed Conoravirus cases crossed 140,000 leading to over 2,400 domestic deaths so far. It is important to first acknowledge the health crisis and those that have lost loved ones or who are currently fighting for their lives against this pandemic. For many others, the consequences of this rapidly spreading virus are primarily financial. With many state and local governments across the United States announcing non-essential business closures and shelter-in-place orders, individuals and families are seeing serious personal finance ramifications. Unemployment claims for the week of March 21st spiked to 3,283,000 which dwarfs the previous high over the last twenty years of 665,000 in March of 2009. Think about that, 3 million people who actually went through the process of filing for unemployment in one week.

In response, Congress has passed three sets of legislation to combat the health and economic damages and is already discussing a fourth. The third and largest piece of legislation, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed by the President on March 27th provides $2 trillion dollars of spending relief. Of that $2 trillion, an estimated $292 billion represents direct payments to Americans.

The Check Amount

The direct payments will be $1,200 for each eligible individual plus $500 for each qualifying child. A qualifying individual is someone who has a social security number, is not a resident alien, and is not eligible to be a dependent on someone else’s tax return. A qualifying child is a dependent who has not attained the age of 17 by the end of the year. So, it’s that easy? $1,200 per adult and $500 per child under 17? Not quite.

The Phase Out

The checks (like most tax benefits) are subject to phase out for those with too much income. For a married couple, the check amount decreases by 5% of the excess of adjusted gross income (AGI) over $150,000. Pull out your last filed tax return, AGI (think total income minus a handful of special expenses) is line 8b on your 2019 tax return or line 7 on your 2018 tax return.

John and his wife Ann have AGI of $155,000 ($155,000 – $150,000 = $5,000 in excess of the threshold). John and Ann’s $1,200 direct payments will be reduced by $250 to $2,150 ($5,000 x 5% = $250 reduction).

The phase out begins at AGI of $75,000 for single filers and $112,500 for head of household filers (single parents caring for a dependent).

AGI Married No ChildrenMarried 1 ChildMarried 2 Children
$150,000$2,400$2,900$3,400
$160,000$1,900$2,400$2,900
$170,000$1,400$1,900$2,400
$180,000$900$1,400$1,900
$190,000$400$900$1,400
$200,000-$400$900
$210,000--$400
$220,000---

The direct payments to Americans are actually structured as 2020 tax credits. 2020 tax credits would normally be calculated with your 2020 tax return, but Congress is advancing these credits to Americans to put money in pockets as soon as possible. How can Congress know my AGI for 2020? They can’t and for that reason the phase out will be based on AGI on your most recently filed tax return, either 2018 or 2019.

2020 Advance Payment True Up

Okay, wait. This $1,200 per adult and $500 per child is a 2020 tax credit but based on 2018 or 2019? The economy in 2018 and 2019 was wildly different than the economy today, how does this make sense? The short answer is, it does not make sense, but it is the best Congress can do to get money to Americans expeditiously. So, if this is really a tax credit what happens if my last filed tax return does not remotely resemble 2020? It depends, but the way it is written, it is a win-win for you.

2020 AGI Less Than 2019

Trip and Amelia have two kids ages 10 and 7. They filed their 2019 tax return showing AGI of $180,000. Amelia is a stay at home mom and Trip works in sales. In 2020, as the economy slows so do Trip’s sales and 2020 AGI only ends up being $130,000. The Treasury will advance Trip and Amelia $1,900. ($1,200 + $1,200 + $500 + $500 = $3,400) ($180,000 – $150,000 = $30,000 x 5% = $1,500 reduction) ($3,400 – $1,500 = $1,900).

When Trip and Amelia file their 2020 tax return in March of 2021 they calculate their true credit to be the full $3,400 but since they were only advanced $1,900 so their 2020 tax return will reflect an additional $1,500 credit.

2020 AGI Greater Than 2019

Jay and Mattie have one 13-year-old daughter. Mattie owns and operates a small-town grocery store and due to all the business accounting that needs to be done, they have not filed their 2019 tax return. The 2018 tax return showed AGI of $140,000 allowing their family the full advance payment amount ($1,200 + $1,200 + $500 = $2,900). Jay and Mattie’s small-town grocery store has its best year in 2020 selling more toilet paper and hand sanitizer than they every thought possible. Their 2020 AGI is $220,000 which means they do not qualify for any of the tax credit based on 2020. However, the CARES Act appears to not require repayment or claw back of the advancement.

So, if the advanced payment is less than the actual 2020 credit later computed, the taxpayer gets an additional tax credit. But, if the advance payment is larger than the true 2020 credit, the taxpayer keeps the advanced payment amount. Kiplinger has developed an online calculator that you might find useful which can be found here.

The Logistics

The CARES Act provides for the Treasury to issue advanced payments via direct deposit where possible. For taxpayers who have received social security benefits or tax refund direct deposited on their 2018 or 2019 tax returns the Treasury will use that bank information and has suggested payments will begin April 17th. Should the Treasury not have your bank account information, the IRS has suggested it will set up a web-based portal for taxpayers to provide their banking information as opposed to having checks mailed to the last known address, which would take much longer. The IRS will mail out notices to all taxpayers receiving payments with instructions on how to report and resolve any issues with the payment. 

The advance payment is not taxable income to the recipient.

Planning Opportunities

Taxpayers who have not filed their 2019 tax returns need to think quickly about whether their 2018 or 2019 tax return would yield the highest advanced payment. If you are subject to phase out, is 2018 or 2019 AGI lower? If 2018 AGI is lower, hold off on filing your 2019 tax return until you receive your economic impact payment. Did you have a child in 2019? You might want to file your 2019 return as soon as possible so you can receive the $500 for an additional qualifying child. Does the IRS not have your bank information? You might consider quickly filing your 2019 tax return and having your refund direct deposited in hopes that it will be processed in time for your stimulus payment to be direct deposited as well. As information changes by the hour in this unprecedented time, please know the above facts could change and the IRS website is a great place to keep up to date. As always, reach out with your questions or thoughts.