The COVID-related Tax Relief Act of 2020 (COVIDTRA), part of the Consolidated Appropriations Act of 2021 (CAA, 2021) contains provisions related to individual income tax.
One provision contains a new program which the COVIDTRA refers to as “additional 2020 recovery rebates” and a refundable tax credit – the Recovery Rebate Credit – to eligible individuals in the amount of $600 per eligible family member.
This column explains the Recovery Rebate Credit, including who is eligible for the credit, how much the credit is, and how the credit is obtained.
To understand how the Recovery Rebate Credit came about, it is important to review some of the legislation passed as part of the CARES Act, which was enacted by Congress on March 27, 2020 very shortly after the start of the COVID-19 pandemic crisis.
The CARES Act provided for direct payments (“stimulus payments”) (via IRS) to individual taxpayers. These payments were known as Economic Impact Payments (EIPs).
The first set of EIPs were delivered by the IRS shortly after the CARES Act passage in March 2020. In order to be eligible to receive an EIP, an individual’s 2019 (or 2018) adjusted gross income (AGI) had to be below certain limits.
The second set of EIPs were delivered to eligible individuals by the IRS in late December 2020 and January 2021. An individual’s eligibility to receive the second EIP was based again on the individual’s 2019 AGI.
The IRS announced on Feb. 16, 2021 that as required by law, it had issued all legally permitted first and second rounds of EIPs. Most individuals who were eligible for the Recovery Rebate Credit have already received both EIPs. Those individuals who received none, or some, of the two rounds of EIP may be eligible to claim the Recovery Rebate Credit and receive the entire, or any unpaid portion of the two reads of the EIP.
Eligibility for the Recovery Rebate Credit
The eligibility requirements for the Recovery Rebate Credit are the same as they were for the EIPs.. Most individuals who are eligible for the Recovery Rebate Credit have already received the credit in advance via the two rounds of EIPs the IRS delivered.
If an individual received the full amount of each EIP, the individual therefore does not need to include any information about either EIP when he or she files the 2020 federal income tax return, nor should the individual apply for the credit.
An individual received the full EIPs if the individual:
· received in the first EIP (issued in late March and April 2020): $1,200 per individual ($2,400 if married filing joint) plus $500 for each qualifying child.
· received in the second EIP (issued in late December 2020 and January 2021) $600 per individual ($1,200 if married filing jointly) plus $600 for each qualifying child.
An individual who either:
(1) did not receive any EIP; or
(2) less than the full amounts may be eligible to claim the Recovery Rebate Credit based on his or her 2020 tax information.
The individual is required to file a 2020 federal income tax return in order to receive all or the remaining portion of the Recovery Rebate Credit. It needs to be emphasized that the two EIP payments were based on an individual’s 2019 AGI (or for the first EIP, some individuals used their lower 2018 AGI in order to qualify).
If the individual’s 2019 AGI was too large to qualify for some or all of the EIPs but his or her 2020 AGI decreased, it is possible that the individual will be eligible for the Recovery Rebate Credit, thereby receiving all of the two EIPs or the EIP portion not received.
The following are the rules for an individual to qualify for the Recovery Rebate Credit: An individual who during 2020:
(1) Was a U.S. citizen or U.S. resident alien;
(2) was not a dependent of another individual; and
(3) has a Social Security number that is valid for employment is eligible for the Recovery Rebate Credit. The credit will be reduced if the individual’s 2020 AGI is greater than:
· $150,000 if married and filing a joint return or filing as a qualifying widow or widower for 2020.
· $112,000 if filing as head of household for 2020.
· $75,000 if filing as single or as married filing separate for 2020.
An individual’s Recovery Rebate Credit will be reduced by 5 percent of the amount by which the individual’s AGI exceeds the applicable AGI threshold as stated above.
The following individuals are not eligible for the Recovery Rebate Credit: (1) An individual who may be claimed as a dependent on another individual’s 2020 tax return.
For example, a child or a student who may be claimed on a parent’s tax return or a dependent parent who may be claimed on an adult child’s tax return; (2) an individual who does not have a Social Security number that is valid for employment issued before the due date of the individual’s 2020 tax return, including extensions; (3) a nonresident alien; (4) an estate or a trust; and (5) any individual who died prior to January 1, 2020.
Factors That May Affect Eligibility for the Recovery Rebate Credit
Although an individual was not eligible for either or both of the EIPs (most likely because the individual’s 2019 AGI exceeded the limit), the individual may still be eligible for the Recovery Rebate Credit since it is based on the individual’s 2020 tax return information. Note again that the EIPs were based on an individual’s 2018 or 2019 tax information.
The following are some factors that may affect eligibility for the Recovery Rebate Credit:
· Income change. Some individuals may have received less than the full EIPs because their 2018 and 2019 AGI was too high. Lower income in 2020 could make the individual eligible for the Recovery Rebate Credit.
· Qualifying child. Individuals who had a child or adopted an eligible child during 2020 may qualify for the Recovery Rebate Credit. Note that children must be under the age of 17 at the end of 2020 to be qualifying children for the Recovery Rebate Credit.
· No longer a dependent. Individuals who were claimed, or could be claimed, as a dependent on another individual’s 2018 or 2019 tax return and therefore not eligible for the EIPs, but who cannot be claimed as a dependent on another individual’s tax return in 2020, may be eligible for the Recovery Rebate Credit.
· Social Security number. Individuals who did not have a Social Security number valid for employment in 2018 or 2019 but received a Social Security number before the due date of their 2020 income tax return (including extensions) may now be eligible.
Claiming and Calculating the Recover Rebate Credit
An individual must file a 2020 federal income tax return in order to claim a Recovery Rebate Credit. The Recovery Rebate Credit worksheet in the 2020 Form 1040 and Form 1040-SR instructions can help an individual determine if the individual is eligible for the credit.
To calculate the credit, an individual will need to know the amount of the EIPs the individual received during the last 12 months. Individuals who have an account on the IRS website and who need to know what they received in EIPs during the last 12 months can view their EIPs at www. irs.gov/account.
Those individuals who do not own an account on the IRS website may create one at www.irs.gov/account. Individuals who received any amount of the first EIP in late March or April 2020 should have received via mail at some time IRS Notice 1444 (Your First Economic Impact Payment), which explained why the individual received the first EIP (“stimulus payment”) and the amount.
The IRS also mailed recipients of the second EIP IRS Notice 1444-B (Your Second Economic Impact Payment) in late January and early February 2021.
Because the Recovery Rebate Credit is a refundable credit, an eligible individual for the credit need not have any 2020 tax liability in order to claim the credit. But the individual needs to file his or her 2020 federal income tax return in order to claim the credit. Line 30 on Form 1040 and Form 1040-SR is a new line on the form this year for the purpose of claiming the credit.
There is a Recovery Rebate Credit worksheet that will help an individual determine if he or she is eligible for the credit. Completing the worksheet is not required but it may be helpful for an individual to use it and keep it for the individual’s records.
The fastest and most accurate way for an individual to calculate his or her Recovery Rebate Credit is to file electronically in which the tax software will figure an individual’s Recovery Rebate Credit. Visit www.irs.gov/filing for details about IRS Free File.
Other information about receiving the Recovery Rebate Credit:
· If an individual is eligible for a refund on his or her 2020 federal income tax return, then the Recovery Rebate Credit will be included as part of the 2020 tax refund. It will not be issued separately.
· A Recovery Rebate Credit can be applied to previous years’ taxes an individual owes.
· A Recovery Rebate Credit can be reduced to pay debts owed to federal or state agencies.