Recovery Rebate Credit (Economic Impact Payments)

In 2020, the world faced unprecedented times and a new normal emerged. The pandemic changed the lives of many that we know. The global effect of Covid-19 made us adapt and grow to circumstances unseen before. Many Americans faced hardship during these times. In response, the federal government issued two relief programs in the form of three payments to help individuals and families overcome hard times.

The Economic Impact Payments were issued in the form of a direct deposit into the taxpayer’s account, a paper check or a prepaid debit card (EIP card). The first round of payments were based on the taxpayer’s 2018 or 2019 return depending on which one was most recently filed. The second round of payments were based on the taxpayers 2019 or 2020 tax return, depending on which one was filed most recently. These first two rounds of Economic Impact Payments were advance payments of the refundable 2020 Recovery Rebate Credit to be claimed on a 2020 tax return. Many individuals who have not filed in years decided to file a 2020 tax return to receive this credit.

The third round of payments were based on your 2019 or 2020 tax return, depending on which one was filed most recently. This round of Economic Impact Payments were advance payments of the refundable 2021 Recovery Rebate Credit to be claimed on a 2021 tax return.

First Economic Impact Payment & Second Economic Impact Payment / 2020 Recovery Rebate Credit

Under the CARES Act in 2020, the first Economic Impact Payments were issued in the amount of up to $1,200 per adult. Qualifying dependents received a flat rate of $500. The second round of payments were approved close to year end in 2020. These payments were in the amount of up to $600 per adult and $600 per dependent and were received as early as January of 2021. The first and second payments were advance payments of the refundable 2020 Recovery Rebate Credit claimed on the 2020 tax returns. It is important to note that qualifying dependents did not receive the payments themselves, but their payments were added to the taxpayer’s payments or credit on their tax return.

Third Economic Impact Payment / 2021 Recovery Rebate Credit

The American Rescue Plan Act was approved in March of 2021. The bill passed another round of payments entitling taxpayers to receive up to $1,400 per individual. This time, the amount for qualifying dependents was $1,400 as well if they were a student of age 23 or younger. Previously, the payments for dependents were only given for dependents under the age of 16. Similar to the other two payments, the dependents did not receive the payments themselves, instead it was included in the taxpayer’s payment. These payments were advance payments of the refundable 2021 Recovery Rebate Credit to be claimed on the 2021 tax returns.

How does the payment affect 2020 and 2021 taxes?

Economic Impact Payments received from the IRS are not reported as income, therefore are not taxable. However, it is critical to ensure the correct amount is being reported on the taxpayer’s tax return. If the payment received is reported incorrectly, the taxpayer’s tax return may be held up for a long period of time and generate notices. Since the Economic Impact Payments were advance payments of credits, some people will have to pay back the IRS for any amount they received which they were not entitled to once they actually file their tax return.

What happens if I didn’t receive a payment?

Those that were eligible for the payments, but did not receive them or did not receive the full amount they were entitled to, will report that on their tax return. This will allow them to receive a credit for the full amount they were entitled to or the difference of what they received and what they should have received. If the taxpayer had a life changing event in 2020 after the payments went out, such as the birth of a child or adoption, the recovery rebate credit for that dependent should still be claimed on their tax return. As mentioned previously, the recovery rebate credit is based on your 2020 tax situation.

The IRS has mailed out notices (IRS Notice 1444) for each payment to show how much has been received. If the taxpayer did not receive a notice, they should double check their bank statements before coming to the conclusion they did not receive a payment. Taxpayers can also login into their IRS account and request an account transcript for the year of 2020. This transcript will reflect the amount received. If a payment was issued but not received, it got lost, misplaced or stolen, taxpayers can call the IRS at 800-829-1040 to trace the payment.

How all three payments compare:

Recovery-Rebate-Table

Useful links:

IRS Individual Account:
https://www.irs.gov/payments/your-online-account

Get my payment Tool:
https://sa.www4.irs.gov/irfof-wmsp/login

IRS information on the Recovery Rebate Credit and Economic Impact Payment:
 https://www.irs.gov/newsroom/recovery-rebate-credit

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