The recovery rebate is an automatic tax-free payment to help with financial situations, with the amount available being dependant on the filing status of the individual:
- $1,200 to those married filing separate or single
- $2,400 to those married filing jointly
- With an additional $500 per chid (under the age of 17) who qualifies for the credit
The rebates will eventually be phased out based upon the individual’s adjusted gross income (AGI). The amount that is phased out will be 5% of the AGI that exceeds the following thresholds:
- $150,000 for joint returns
- $112,500 if the individual is the head of the household
- $75,000 for all other eligible individuals (which will not include estates or trusts)
Those who have an AGI above the thresholds will have the rebate slowly reduced (by 5%) until it gets to zero i.e. those who have an AGI of $99,000+ (individual taxpayers) will have their rebates reduced to zero.
Those who have an AGI lower than the amounts stated, will receive the full amount of recover rebate available.
To be eligible for the rebate, the United States Congress has specified the individual must not be the following:
- A non-resident alien
- An estate or trust
- “Any individual with respect to whom a deduction under section 151 is allowable to another taxpayer” i.e. an individual who is not listed as a dependant for another taxpayer
- As mentioned above those who have an AGI of less that the stated amounts will still qualify for the rebate.
Students may be eligible so long as they are not considered a dependant of their parents. Generally, a full-time student, who is under the age of 24, is considered a dependant if the parent provides over half of financial support.
Senior citizens who only earn an income of social security and veterans earning an income of veterans’ disability payment will be eligible, providing they are not dependants to another taxpayer.
It would appear that eligible taxpayers residing overseas will also receive the rebate and based on the wording of the rules, and the use of “AGI”, those who have used the foreign earned income exclusion to reduce their income may particularly benefit.
Co-ordination with advance refunds or credits
If the circumstance arises in which an individual had an AGI above the threshold during the year (2019) but lost their job due to COVID-19, they will still be eligible for the recovery rebate;
- If income was above the threshold, individuals will still receive a partial rebate based off their 2019 income tax return.
The rebate will be an advance on a tax credit, which will be able to be claimed on the following years (2020) tax return. If there is a change in income (the 2020 income is lower than 2019), any additional credits the taxpayer was eligible for will be refunded or used to reduce the tax liability for 2020.
Given the recovery rebate is not taxable, it will be treated the same as other refundable credits (such as child tax credit).
Furthermore, if the amount of credits the taxpayer qualifies for is in 2020 lower than the amount in 2019, the difference between the two amounts will not have to be paid back.
Identification Number Requirements
As a rule, no credit will be paid to eligible individuals if the following are not including on the tax return submitted a valid identification number (social security number) for:
- The individual
- The individual’s spouse if filing jointly
- All qualifying children
With regards to the qualifying child/children, if they are adopted the identification number can include the adoption taxpayer identification number of the child or children.
Taxpayers who provide an ITIN or Individual Taxpayer Identification number will be ineligible for the recovery rebate. This also means those filing jointly where one spouse provides a Social Security Number (SSN) and one provides an ITIN will also be ineligible.
An exception to the identification number requirement is only available for those in the armed forces. Individuals in the armed forces will not have to provide an SSN and those filing jointly, only one spouse must provide an SSN.
Timing and Manner of Payment
With regards to timing, the provisions for the rebate will be available as quickly as possible for taxpayers to utilise.
However, no payments or credits under the recovery rebate will be made after 31st December 2020.
With regards to the delivery of payments, these will be processed electronically to any accounts that have been authorised by taxpayers on or after January 1st 2018, to receive any federal refund.
For many individuals, no action will be required to receive the rebate as the IRS will use the taxpayer’s 2019 return (if filed) or their 2018 return (if the 2019 is not filed) to determine the rebate amount.
The IRS intend to use the last known address to mail out checks so if you have moved since filing your 2018 US return you may wish to promptly submit an address change form.
It should be noted that there will be no interest applied to any overpayment.
This rebate cannot be used to reduce certain unpaid debts (which includes any owed to a federal agency), past or due income taxes, federal taxes or unemployment compensation debts.
Notice to Taxpayers
Once the recovery rebate has been paid, the taxpayer will be notified by post no later than 15 days after the payment has been made. The notice will be posted to the last known address of the taxpayer and will indicate the following:
- The method the rebate was paid (i.e. cheque)
- The amount that was paid
- A phone number for the point of contact at the IRS to report any failure to receive such payment
The CARES (Coronavirus Aid Relief and Economic Security) Act also aims to incentivise charitable donations. To do this the act provides an income adjustment or an above the line deduction of up to $300 for those who do not itemise deductions.
This must be done via qualified charitable contributions i.e. a contribution made in cash to a charitable organisation which is not a supporting organisation, donor advised fund or a carryover from a prior year.