The voices of Tax Policy Center's researchers and staff
One big unanswered question about the COVID-19 recovery rebates included in the Coronavirus Aid, Relief, and Economic Stimulus (CARES) Act: What year’s income will the IRS use to calculate payment amounts?
Depending on the situation, the IRS could use the tax filer’s income in 2018, 2019, or 2020. Same goes for the number of dependents and marital status in those years. One reason this matters: The payments of $1,200 for an adult and $500 for each child under age 17 phase out with income. For example, single filers making $75,000 or more get a reduced payment, and for those who earn $99,000 or more, the payment is completely phased out.
And the various years used in the rebate payment computation may give some filers an opportunity to legally game the system to maximize their payment. One thing is sure: This is one game players can’t lose.
The law says the rebate is technically an advance credit against your 2020 taxes (the return you’ll file in early 2021). Thus, it eventually will be based on your adjusted gross income, filing status, and kids under the age of 17 for 2020. That is as it should be—the financial situations of millions of people will be worse this year due to the unprecedented pandemic shock to the world economy.
But if you got laid off in March or April, you need that advance tax credit money now. And since neither you nor the Internal Revenue Service know what your total income will be in 2020, the IRS will base your payment on your 2019 federal income tax return. If you have not filed your 2019 return at the time of determination, your payment will be based on your 2018 tax return.
What is the time of determination? Good question, but so far, the IRS has not said.
But here is the win/win: If your tax year 2020 rebate turns out to be bigger than the amount you received this year, you will get the excess, which can generate a larger refund when you file next year.
However, you will not have to give back the payment if your rebate based on 2020 income turns out to be smaller than the amount you get this year. Thus, some filers may have an opportunity to strategically time their 2019 returns--if they have not filed already.
Imagine, for example, Eleanor and her twin brother Mark.
In 2018, Eleanor was an impoverished math PhD candidate. But after getting her degree, she made $300,000 in 2019 as a hedge fund quant. She could maximize her immediate payment by having the IRS base her rebate on her 2018 income. And Eleanor the quant could make that happen by pushing off filing her 2019 return until after the time of determination.
Mark, by contrast, made $100,000 as a top events planner in 2018. But he gave up that career in early 2019 to manage a trendy new restaurant, halving his salary. That restaurant has now closed because of a stay-at-home order.
Mark’s best move might be to file his 2019 tax return quickly and request a direct deposit of his refund—hoping that the IRS will compute his payment based on his modest 2019 earnings, which were below $75,000—the level where the payment begins to phase out for singles. But he needs to file before that unknown time of determination.
If he misses the deadline, both Eleanor and Mark likely will have their rebate based on their 2018 incomes. Eleanor would get the entire $1,200 and wouldn’t have to pay anything back. Mark would get nothing this year, though he would get his full $1,200 rebate next year when he files his 2020 income tax return reflecting the significant drop in his income caused by the pandemic.
The ability to game the system rests on the meaning of those five words: at the time of determination. The IRS may already have determined the payment amounts for those who will receive direct deposits starting next week. And if everyone’s payment is determined this week, there probably is no benefit to changing when you file for 2019. But if the IRS won’t immediately determine payments for everyone, there is a legal opportunity to game the system.
One might ask why Congress intended that there be no comprehensive end-of-year reconciliation of the advance tax credit on the 2020 tax returns. After all, money paid now to the Eleanors of the world could have been used to support larger rebates for the Marks and those even worse off.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
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