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Congress Reaches Agreement on a Coronavirus Relief Package: Tax Aspects of the CARES Act

Congress had finally agreed upon a stimulus package designed to reverse the devastating impact of the COVID-19 pandemic. The Senate overwhelmingly passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and the House is set to do the same on Friday, paving the way for the President to sign the bill into law.

Individual Stimulus Payments

The headliner of the CARES Act is the individual stimulus payment, or as it's officially titled, the "2020 recovery rebate for individuals. The government will immediately begin cutting checks directly to individual taxpayers, putting nearly $507 billion in cash into the hands of most adult Americans, and ideally, right back into the struggling economy. Here's how it will work:

The IRS is going to take a look at your 2019 tax return. If your 2019 return has not yet been filed, the Service will use your 2018 return instead. And even better: if you haven't filed a return for EITHER year for example, you collected Social Security, but did not have enough taxable income to necessitate the filing of a return the IRS will determine that you are eligible for a check based on your Form SSA-1099, Social Security Benefit Statement.

Once the IRS has either your 2019 return, 2018 return, or Social Security statement, it's going to cut you a check for $1,200 (if single/$2,400 if married filing jointly) PLUS $500 for each child under the age of 17. Unlike the initial version of the bill, the payment is in no way limited to your tax liability or dependent on you having earned a minimum amount of "qualifying income."

Example. A is a single taxpayer. On A's 2019 tax return, A had gross income of $50,000 and an income tax liability of $1,000. Despite the fact that A's tax liability for 2019 A was only $1,000, A is entitled to receive a check for $1,200.

Example. B is a single taxpayer who has not yet filed a 2019 return. In 2018, he had Social Security income of $10,000. As a result, he did not file a tax return because his income was less than the $12,000 standard deduction. The IRS will access B's Social Security statement for 2018, and issue a check to B for $1,200.

Example. H & W are married with three children. On their 2019 tax return, they reported taxable income of $60,000 and had a tax liability of $5,000 before withholding and credits fully eliminated the liability and gave rise to a $3,000 refund. Nevertheless, H & W will receive a check for $3,900 from the government as part of the 2020 stimulus payment.

Not everyone gets a check, however. You'll need to have provided a valid social security number for yourself, your spouse and any qualifying children on your tax returns, and those who are claimed as a dependent on another's tax return also won't be receiving a payment.

Finally, those on the higher end of the income scale will be shut out of the program. Once Adjusted Gross Income (AGI) exceeds $75,000 (if single, $150,000 if married). Once over those thresholds, you'll lose $5 of your payment for every $100 your AGI exceeds those thresholds.

The payments will be made between now and December 31, 2020 in many cases, it will be paid electronically if you have provided direct deposit information to the IRS on your 2018 or 2019 tax returns but it's important to understand that any payment you receive acts as an advance payment of a credit you will compute AGAIN on your 2020 tax return.

What that means is that when 2021 rolls around and you prepare your 2020 tax return, you'll have to recompute the amount you're owed based on 2020 data. If the advance payment was less than what you are owed in 2020 for example, you were phased out in 2019 but not 2020 or you had another child, the excess will be treated as a credit that reduces your 2020 tax liability.

It is entirely possible a taxpayer could, for example, receive an advance payment in 2020 based on 2019 or 2018 income, only to find themselves ABOVE the phase out threshold in 2020, giving rise to no credit on the 2020 return, and yet still not have to repay the excess amount to the IRS.

Putting it all together, there are some people who will NOT receive an immediate check because they did not file a 2018 or 2019 return and do not receive a Form SSA-1099, Social Security Statement. If that taxpayer files a 2020 return, however, he or she will receive a credit equal to that payment, provided income, filing status and family size haven't significantly changed. In other words, as long as you file a return in ANY ONE of 2018, 2019, or 2020 and don't have income in excess of the phase-out threshold, you'll be getting either an advance payment or a credit.

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