On March 27th, 2020, the CARES Act was signed into law. The act established a new section within the Internal Revenue Code (“the Code”) designed to provide relief for individuals amid the Coronavirus Pandemic. The Code established an economic relief payment for all US taxpayers, with payments beginning in April 2020. Despite the wide attention this section received, taxpayers may still have several questions.
How will I report my receipt of the relief payment on my 2020 return?
When will I receive my payment?
Will I qualify for this payment?
Will I have to repay this payment if my 2020 income is too high?
The IRS has issued guidance to explain the answers to these questions. The CARES act establishes the exact nature of the payment and defines which taxpayers are eligible to receive it. The CARES act states that “In the case of an eligible individual, there shall be allowed as a credit against the tax imposed . . . for the first taxable year beginning in 2020.” This section creates a special one-time credit that offsets the federal tax that would have been owed on the 2020 tax return. Because this is a new and additional credit, it does not replace or substitute any other credits that can be claimed on the 2020 return. This means that accepting the relief payment will not change the amounts reported on your 2020 tax return, and it will not need to be reported as income at the state or federal level. When filing the 2020 return, you will report that you have received an advanced payment for your credit. Everything else will remain unchanged.
However, many individuals have not received a payment. The IRS has established several tools to track the status of your payment and to determine your eligibility to receive such. These tools are available here: https://www.irs.gov/coronavirus/get-my-payment. Some taxpayers may see that they are not scheduled to receive their payment, despite qualifying under the requirements in the CARES act, which states that everyone is eligible except for nonresident alien individuals, dependents, estates and trusts, and those whose adjusted gross income is greater than the established limitations. If you qualify for the payment but are not scheduled to receive the full amount that you are entitled to receive, you will be able to claim the credit when you file your 2020 tax return. Common examples of this are individuals who have a child in 2020 and individuals who do not qualify based off of their 2019 income but will based off of their 2020 income. If you qualify to receive a payment but have not received it yet, the 2020 return is your opportunity to correct this and receive the amounts to which you are entitled.
Finally, some individuals may be concerned that their 2020 income will be beyond the established threshold and are therefore ineligible for the amount they have received. The IRS has indicated that payments made to individuals who qualify based off of their previously filed tax returns will not be reevaluated against their 2020 income. This means that if you have already received an appropriate payment, you will not face any obligation to repay it on your 2020 tax return if your income is higher.
As the pandemic continues to shift and evolve, there may be additional changes that affect your individual tax burden. As your tax professionals, we take seriously the trust you have placed in us to help navigate these times. We are proud to offer our support and expertise on any personal or business tax needs or questions you may have.