Turns Out, it is Not A Normal Year
In a normal year, it’s a good idea to nudge your clients to file their taxes early. It helps to reduce fraud risk, gets your clients a refund sooner, and eliminates the frantic rush mid-April.
This year things are a little different. Depending on when your client files their 2020 tax return — and when the IRS processes their third stimulus check —can affect how much money they receive as a stimulus payment.
With $1,400 checks for qualifying taxpayer and their dependent(s) going out as this third stimulus payment, filing early or later can have a big impact.
When filing early may lead to a higher stimulus payment
Your clients may end up with a higher stimulus payment earlier if they file now. That may include clients who:
- Have lower income in 2020
- Had a child in 2020
- Got married in 2020
How does this actually work? Let’s walk through some examples:
A client with lower income in 2020
Bob was well-paid before the pandemic. He had an AGI of $130,000 on his 2019 tax return. In 2020 he was laid off and unable to find another job and in 2020 his AGI decreased to $65,000. If the IRS uses his 2019 tax return, he won’t receive a stimulus payment right now — he’ll need to wait until his 2020 taxes are filed. By filing right now, that he’ll be able to receive a stimulus check that he qualifies for based on his 2020 information.
A client who had a child in 2020
Vickie and Sam welcomed a child in 2020. They also file jointly and earned $100,000 in both 2019 and 2020. If they don’t file their 2020 taxes before the IRS processes their stimulus payments, their payment won’t include an extra $1,400 for their new dependent child.
A client who got married in 2020
The pandemic didn’t stop couples from saying “I do” and Rita and Steve were among the 2020 newlyweds. In 2019 Rita’s AGI was $85,000 and Steve’s AGI was $65,000. Their AGI’s remained the same in 2020. If the IRS uses their 2019 tax information, Steve will receive a stimulus payment of $1,400 and Rita won’t receive anything. But if their 2020 tax return is used and they’ve filed jointly, they’ll receive a $2,800 stimulus payment.
If these clients wait to file and the IRS uses their 2019 tax information, they might receive a lower stimulus payment. That should eventually be reconciled when they file their 2021 taxes by claiming the Recovery Rebate Credit.
When filing later may lead to a higher stimulus payment
Filing early won’t increase everyone’s stimulus payment. Your clients may end up with a lower stimulus payment if they file now. That may include clients who:
- Have higher income in 2020
- Can’t claim a child as a dependent anymore in 2020
- Got divorced in 2020
A client with higher income in 2020
Janet is a frontline worker who ended up taking on more shifts than normal during 2020. In 2019 her AGI was $72,000, making her eligible for the third stimulus payment of $1,400. But in 2020, her AGI increased to $87,000, making her ineligible for the stimulus payment. If she files her 2020 taxes before the IRS processes her stimulus payment, she won’t receive the $1,400 stimulus. If she waits and files her tax return later, the IRS will use her 2019 tax return information and send her a $1,400 stimulus check.
A client who no longer has a child as a dependent
Ricky and Meg have a son Patrick who was a qualifying dependent in 2019. In 2020 he moved out, got a job, and is no longer considered a dependent child. In both 2019 and 2020, Ricky and Meg have a combined AGI of $100,000. If the IRS uses their 2019 tax data, they’ll receive a stimulus payment of $2,800 for themselves and $1,400 for Patrick. If Ricky and Meg file their 2020 taxes showing that Patrick is no longer a dependent before the IRS processes their stimulus payment, they won’t receive the additional $1,400 for Patrick.
Clients who got divorced in 2020
Jenny and Joe were married in 2019 but ended up getting a divorce in 2020. In 2019 their combined AGI was $130,000. In 2020, Jenny’s AGI is $50,000 while Joe’s is $80,000. If the IRS processes their stimulus payment before Jenny and Joe file their separate tax returns, they’ll receive a combined stimulus payment of $2,800. If they each file their own return before their stimulus check is processed, Jenny will receive a stimulus payment of $1,400 while Joe won’t receive anything.
In these three situations, if these clients wait to file and the IRS uses their 2019 tax information, they will get a larger stimulus payment. But will they need to pay it back? In August, the IRS stated that if a taxpayer received a stimulus payment based on 2019 or 2018 tax return information but based on their 2020 tax return information, they were not eligible for the stimulus payment, they wouldn’t need to pay back the money they received. The IRS hasn’t updated that with any additional guidance specifically for the third stimulus payment.
{Article Disclosure:} Information provided in this communication is general in nature and may not apply to the specific circumstance of every taxpayer. Please refer to IRS or other cited source material for particulars.