Recovery Rebates: Direct Payments to Individuals

Updated as of April 10, 2020

This article was updated on April 10 to share guidance on how low-income citizens who normally do not have to file returns can provide information to the IRS to obtain their rebate checks.

Described as “recovery rebates,” the CARES Act promises cash payments to most individual taxpayers, which the IRS plans to provide through direct deposit when possible or checks via mail sometime in the next few weeks.

Qualifying recipients consist of individuals other than dependents of others and nonresident aliens. The payout amounts vary, and are based on 2020 filing status, “Adjusted Gross Income” (AGI) and qualifying children, using estimates based on the most recent 1040 data available (2018 or 2019).

Some individuals rarely file returns because their incomes are under the reporting threshold, and for those, the IRS will base payments on data available from other sources, like Social Security records, with no action required by the taxpayer.  However, some individuals who are not required to file Forms 1040 also do not receive Social Security payments, and the IRS may not have sufficient information on which to base a rebate calculation.  The IRS has provided a means for those individuals to provide information on the IRS website to initiate their rebates.  The IRS plans to send direct-deposit rebates within a few weeks, and will begin sending paper checks for those taxpayers who do not use direct deposit shortly thereafter, targeting low-income recipients first. The process may take several months. The IRS also plans to provide a means by which those who haven’t used direct deposit, but wish to begin doing so for this purpose, to enroll for direct deposit via web. That enrollment option and other IRS updates can be found on the IRS website.

Individuals with incomes over certain levels will receive no payments, and those with incomes close to those levels will receive reduced payments.

The rebates equal $1,200 per qualifying individual (or $2,400 per jointly-filing couple), plus $500 for each qualifying child (generally children under age 17 who also qualify the filer for the child credit). The rebate is then phased out 5% of the amount by which the taxpayer’s AGI exceeds $75,000, $112,500, or $150,000, for single, head of household, or joint filers, respectively.

Here is how to compute what you might receive:

Filing Status
Single Head of Household Married/Jointly
Is your income this amount or higher?  If so, you are ineligible for the rebate.  If not, continue below. 99,000 136,500 198,000
Initial amount 1,200 1,200 2,400
+ Add $500 for each child that qualifies for the child credit (generally dependents under age 17)
= Rebate before limitation
Enter your AGI
– Subtract this amount from AGI 75,000 112,500 150,000
= Subtotal (If zero or negative, stop here.  Your rebate is not limited.  If positive, multiply this amount by 5% and subtract it from the “rebate before limitation.”  The result is your rebate.)

Although these payments will arrive soon, technically this rebate is treated as a “refundable” credit of your 2020 tax. Look at it as an additional amount of federal income tax that you can pretend was withheld from your wages. Unfortunately, if someone’s 2018 or 2019 income was higher than 2020’s will be (perhaps due to a 2018/2019 sale of investments or 2020 loss of employment), a person might receive a reduced rebate or none at all in the next few weeks due to the phase-outs described above. However, because these payments are advances of 2020 amounts, a reckoning will be performed on filers’ 2020 Forms 1040, and at that time he or she should receive the difference. It does not appear that the inverse can occur. In other words, if you receive too much (based on 2018/2019 specs), it will not need to be returned.

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Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.

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