Claiming the recovery rebate credit on 2020 individual returns

Editor: Valrie Chambers, CPA, Ph.D.

Individuals who were eligible for an economic impact payment but did not receive one, or were eligible for a larger payment than they received, may be able to claim a recovery rebate credit when they file their income tax return for 2020. [Editor's note: This item discusses the first round of recovery rebates in Sec. 6428 and not the second round enacted in December 2020 in Sec. 6428A.]

The economic impact payments and rebate recovery credit were authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136. All eligible individuals are entitled to a payment or credit of up to $1,200 for individuals or $2,400 for married couples filing jointly. Eligible individuals also receive $500 for each qualifying child.

Tax preparers will need to be aware of available resources to assist clients in calculating the allowable recovery rebate credit. The IRS updates frequently asked questions (FAQs) on its Economic Impact Payment Information Center webpage, available at www.irs.gov.

This item discusses selected FAQs and updates. While FAQs are helpful to preparers, FAQs may not be relied upon as legal authority. More information about FAQs generally, including the extent to which taxpayers may rely on them, is provided in the National Taxpayer Advocate's NTA Blog for July 7, 2020, at taxpayeradvocate.irs.gov and in "Categorizing FAQs in the Guidance Sphere," also in this issue.

To claim a recovery rebate credit, taxpayers will need to reconcile their economic impact payment with any recovery rebate credit amount for which they are eligible on their 2020 Form 1040, U.S. Individual Income Tax Return, page 2, line 30 (draft version). The credit will be added to any refund or reduce any tax due on the 2020 individual return. The final form instructions may allow qualifying taxpayers who do not complete the credit computation to ask the IRS to calculate the amount for them, as was done for the previous recovery rebate credit under the Economic Stimulus Act of 2008, P.L. 110-185, when 2008 returns were filed.

Common reasons why taxpayers may claim a recovery rebate credit include reduced income in 2020, a change in marital filing status, a change in the number of dependents, and not having received an economic impact payment for which they were eligible. The latter reason may occur where an individual had no filing requirement in 2018 or 2019 and did not request a payment.

If an eligible individual was entitled to an economic impact payment and received a payment greater than the recovery rebate credit calculated on the 2020 return, he or she still in most cases gets to keep the original payment. The excess does not need to be repaid to the IRS. However, in the case of the death of the taxpayer or a jointly filing spouse before receipt of the payment, or nonresident alien status for 2020, the FAQs direct the payment or portion of it allocable to the decedent or issued to the nonresident alien to be returned or repaid.

The economic impact payment is not taxable income to the recipient. If the IRS adjusts a taxpayer's recovery rebate credit calculation, it will do so as a "math error adjustment."

If taxpayers do not know the amount of the economic impact payment they received, they can request their 2020 tax transcript from the IRS online or by mail to the address of record. Details are available at www.irs.gov. The AICPA has published a CARES Act Stimulus Calculator that may be helpful to tax preparers. The AICPA calculator, available at future.aicpa.org, will be updated as the IRS issues additional guidance.

The IRS's FAQs expand on criteria for persons who are eligible for economic impact payments. (For more on who is eligible, see the IRS's EIP eligibility page.) The FAQs also list classes of individuals ineligible for the payment altogether. These include persons who can be claimed as a dependent on someone else's return, including children; students over age 17 who can be claimed as a dependent on a parent's return; and dependent adults claimed by another person. Other ineligible classes are persons without a Social Security number (SSN) that is valid for employment (with an exception for qualifying children with an adoption taxpayer identification number). Also ineligible are filers of Form 1040-NR, U.S. Nonresident Alien Income Tax Return; Form 1040-PR, Planilla Para la Declaración de la Contribución Federal Sobre el Trabajo por Cuenta Propia (Incluyendo el Crédito Tributario Adicional por Hijos Para Residentes Bona Fide de Puerto Rico); or Form 1040-SS, U.S. Self-Employment Tax Return (Including the Additional Child Tax Credit for Bona Fide Residents of Puerto Rico); other nonresident aliens; deceased individuals; and an estate or trust.

The IRS took the position that incarcerated individuals are ineligible for the economic impact payment (but not a recovery rebate credit). However, a district court held the Service cannot deny a payment to incarcerated individuals who are otherwise eligible (Scholl v. Mnuchin, No. 20-cv-05309 (N.D. Cal. 10/14/20) (order granting permanent injunction and class certification)). The IRS accordingly on Oct. 8, 2020, opened to incarcerated individuals its paper filing procedures through Nov. 4, 2020, for 2019 returns establishing eligibility and its online application portal through Nov. 21, 2020. However, the IRS also appealed this court ruling, so preparers should consult FAQ A7 for further updates.

Additional topics addressed under the FAQs are economic impact payments to residents of five U.S. territories and citizens or residents of three U.S.-associated Pacific island nations. The local tax authorities of these governments, rather than the U.S. Treasury, provide economic impact payments to their residents.

The Treasury Offset Program

Economic impact payments are generally not subject to reduction or offset to pay back taxes or other debts owed to the federal or a state government. However, the Treasury Offset Program did allow payments to be diverted to state child support enforcement agencies for back child support. The IRS announced it would automatically return an injured spouse's portion of his or her spouse's past-due child support (IR-2020-192). If the injured spouse has not yet received the catch-up economic impact payment when he or she files a 2020 return, then the injured spouse should not submit Form 8379, Injured Spouse Allocation, and should instead consult FAQ D2 for updated IRS guidance.

FAQs on eligible and ineligible taxpayers

The FAQs refer to taxpayers who are automatically eligible and ineligible to receive an economic impact payment:

Eligible taxpayers include:

• Q A2: U.S. citizens living abroad.
• Q A6: Resident aliens who have SSNs and are qualified to work in the United States.
• Q C1: Eligible individuals may also receive an additional $500 per qualifying child of the taxpayer within the meaning of Sec. 24(c). Children born, adopted, or placed in foster care in 2020 will not have been included in an economic impact payment, but a corresponding amount may be claimed as a recovery rebate credit on the taxpayer's 2020 return.

Ineligible taxpayers include:

• Q A5: Decedents who received an economic impact payment after death. A surviving spouse who received a payment amount based on a 2018 or 2019 jointly filed return with a spouse who died before the payment was received needs to return only the portion allocable to the decedent.
• Q A6: Nonresident aliens and resident aliens who do not have SSNs that qualify them for work in the United States.
• Q C6: Persons who can be claimed by someone else as a dependent.

Returning economic impact payments by ineligible taxpayers

The IRS instructs persons who received an erroneous economic impact payment to return it to the IRS. It was not known at the time of this writing what steps the IRS would take to collect an economic impact payment made in error. FAQ Topic I provides detailed instructions on how to return payments received by check, direct deposit, or debit card.

For a detailed discussion of the tax planning issues in this area, see Gross et al., "Recovery Rebates: Tax Planning Pitfalls and Opportunities," 51 The Tax Adviser 456 (July 2020).