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Form 1040

Practice Alert: Timing of 2020 Form 1040 Filing to Maximize Economic Impact Payments

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

The American Rescue Plan Act of 2021, which is expected to become law this month, contains a third Economic Impact Payment (EIP). For many taxpayers, the amount of that EIP can be affected by the timing of the filing of their 2020 Form 1040. And that timing can also affect taxpayers’ 2020 and 2021 Recovery Rebate Credits.

Background—2020 EIP legislation.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act, PL 116-136) provided for direct payments/rebates to eligible individual taxpayers. These payments were referred to as Economic Impact Payments (“EIP 1”). (Code Sec. 6428(f)) EIP 1 is actually an advance payment of a credit, the Recovery Rebate Credit (RRC 1). (Code Sec. 6428(e))

Code Sec. 6428A, as added by Sec. 272 of the COVID-Related Tax Relief Act (COVIDTRA), which is part of the Consolidated Appropriations Act, 2021 (PL 116-260), also provides an RRC (RRC 2) and an Economic Impact Payment (EIP 2).

With respect to both of the EIPs,

  • IRS is authorized to send EIPs to eligible individuals using their 2019 return information to determine their eligibility for the credit or, in certain cases, their 2018 return information. (Code Sec. 6428(f); Code Sec. 6428A(f))
  • The RRC is offset by the EIP, but the RRC cannot be reduced below zero by the EIP. (Code Sec. 6428(e); Code Sec. 6428A(e))

Observation.

In other words, with respect to each EIP/RRC set, the taxpayer gets a tax benefit equal to the higher of the RRC (before it is offset by the EIP) or the EIP.

  • The term “eligible individual” does not include several categories of individuals including any nonresident alien and anyone who qualifies as another person’s dependent. (Code Sec. 6428(d); Code Sec. 6428A(d))

Background—American Rescue Plan Act.

The American Rescue Plan Act of 2021 (ARPA), as passed on March 6 by the Senate, contains a provision to provide a $1,400 stimulus payment (EIP 3). The amount of the payment phases out ratably for single filers with AGI over $75,000 ($112,750 for heads of households; $150,000 for joint filers). The payment phases out fully for single taxpayers with $80,000 of AGI ($120,000 for heads of household; $160,000 for joint filers). AGI, for this purpose is 2020 AGI, or 2019 AGI for taxpayers who have not already filed their 2020 return. (Code Sec. 6428B, if added by Senate-passed ARPA Sec. 9601) The bill also has an RRC (RRC 3).

The House-passed version has a very similar provision. (Code Sec. 6428B, if added by House-passed ARPA Sec. 9601)

As is the case with EIP 1 and EIP 2,

  • EIP 3 is an advance payment of RRC 3. (Code Sec. 6428B(b), if added by ARPA Sec. 9601)
  • RRC 3 is offset by EIP 3, and RRC 3 cannot be reduced below zero by EIP 3. (Code Sec. 6428B(f)(1), if added by ARPA Sec. 9601)
  • The term “eligible individual” does not include several categories of individuals including any nonresident alien and anyone who qualifies as another person’s dependent. (Code Sec. 6428B(c), if added by ARPA Sec. 9601)

Deciding when to file 2020 Form 1040.

Here are some EIP factors to think about when deciding when to file a 2020 Form 1040.

  • If you did not receive EIP 1 or EIP 2, or if the amount you received was incorrect, you may want to file your 2020 return as soon as possible. By claiming the RRC on that return, you will get back benefits for the missed stimulus checks. You should do this even if you are normally not required to file a return.
  • You may also wish to file as soon as possible if the sum of RRC 1 and RRC 2 is higher than the sum of your EIP 1 and EIP 2. Doing so should enable you to receive that excess, as a credit, more quickly. You may be in this circumstance if your 2020 AGI is lower than your 2019 (or 2018 under the circumstances described under “IRS is authorized to send,” above) AGI, you added one or more new dependents in 2020, you went from being a dependent in 2019 to not being a dependent in 2020, and/or you went from being a nonresident alien in 2019 to not being a nonresident alien in 2020.
  • Similarly, if your 2020 AGI is lower than your 2019 AGI and/or you added one or more new dependents in 2020 and/or you went from being a dependent/nonresident alien in 2019 to not being a dependent/nonresident alien in 2020, your EIP 3 may be higher if you file before IRS computes your EIP 3 than if you file after that time. (But, note that, if you meet any of those requirements and file after IRS computes your EIP 3, you can receive as RRC 3 the extra amount that you would have received had you filed before IRS computed your EIP 3. You just have to wait until you file your 2021 return to get that extra amount.)
  • Conversely, if your situation is the opposite of that described in the immediately preceding paragraph—e.g., 2020 AGI is higher than your 2019 AGI and/or you have fewer dependents in 2020 than you had in 2019—your EIP 3 may be higher if you file after IRS computes your EIP 3. That is because IRS will compute your EIP 3 using your 2019 return if you haven’t already filed your 2020 return. And, because, as described in the Observation above, your ARPA tax benefit is the higher of RRC 3 or EIP 3, you won’t have to give back any portion of EIP 3 when you file your 2021 Form 1040.
  • Filing status changes can also be relevant to the above decisions. For example, assume you were single in 2019 and qualified for a full $1400 EIP 3 based on your 2019 return, then you got married in 2020 and your spouse had enough 2020 AGI, when combined with yours, to result in the two of you not receiving any EIP 3. You would be better off holding off filing your 2020 return until after IRS determines your EIP 3, unless you plan on filing separately for 2020.

When will IRS compute your EIP 3?

Because ARPA hasn’t yet been signed into law, it isn’t clear when IRS will determine each taxpayer’s EIP 3. And, even when the ARPA becomes law, it isn’t a sure thing that IRS will announce when it will make that determination. However, even if IRS doesn’t make such an announcement, it seems very likely that taxpayers who wish to file their 2020 return after IRS determines their EIP will make that wish come true by filing for an extension. And, taxpayers who wish to file before IRS makes that determination are very likely to make that wish come true if they file before the March 14 deadline that President Biden has set for enacting ARPA; they probably (but not definitely) have some time after that as well.

To continue your research on information on EIPs and RRCs, see FTC 2d/FIN ¶A-4430 and FTC 2d/FIN ¶A-4465.

 

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