Key Points About Stimulus Checks and 2020 Taxes

Once upon a time, there was a pandemic, the government shut everything down and then tried to send everyone a stimulus check to boost the economy. The end.

So it isn’t as simple as that, but the process of handing out stimulus checks was more like a corporate figurehead making seemingly helpful changes as they casually skim through your department. Then walking away while you and your coworkers are left muttering – do you think he realizes how much extra work that actually added to our workload?  The powers that be did try and do good things. I’m sure everyone who received a stimulus check was very appreciative of a fairly unprecedented event. However, they were (and are) trying to execute plans before the fine print (or the how to manual) could even be written. This left a lot of us normal working Americans with confusion regarding the stimulus monies. Some prevalent questions are:

• Will the stimulus check affect 2020 taxes?
• Is it a loan on future taxes I have to pay back?
• I haven’t gotten my stimulus check, am I out of luck?
• How does the stimulus check affect my taxes?
• Any many more

Will the stimulus effect my taxes?

First, we don’t know how it will actually affect the 2020 tax returns because the forms don’t exist yet. We do know how the law was passed and the wording contained within. We also feel we have a really good handle on how it will pan out.

Like almost all answers related to taxes, the most accurate answer to nearly all the questions is ‘it depends on your personal circumstances’. However, the intent was for the stimulus to be a fairly simple and streamlined event. Here is what was ‘intended’:

The stimulus was passed as a credit (or bonus, like extra refund) for taxes. It couldn’t be backwards applied to 2019, so they were forced to add it to our 2020 tax returns. However, we, the people needed assistance much sooner than early 2021. So, the US Treasury started issuing advances of the credit, with a catch. The monies would only be available to those under a certain income level. It wasn’t a line that went from 100% to 0% by crossing, it was designed as a curve.

If you were only a little over the line, you only had (or will have) a slight reduction in the stimulus check amount. If you were really far over the line you got (or will get) a big reduction, potentially $0 of the stimulus. The way the income ‘limit’ is identified per person is based on your 2019 tax return. Due to the extension of the deadline to file taxes, there was a sizeable number of folks who had not yet filed 2019 taxes, nor planned to do so anytime soon when the stimulus advances were being identified and sent out. The fallback for the feds was to then utilize the 2018 tax return information to at least send something. However, the way it is written (subject to changes by future fine print) is the ‘correct’ stimulus amount will ultimately be determined by your 2019 information.

Bumps in the road

As we are all keenly aware – things have not gone perfectly smooth for everyone. Certainly a lot of folks got their stimulus checks fairly quickly and it will be accurate, meaning their 2020 taxes will not be affected by the stimulus. They should have gotten X dollars, they got exactly X dollars – no change to the tax return. If someone never got the stimulus during 2020 (2020 isn’t over yet as of the writing of this article), then they should have gotten X dollars, they got 0 dollars, they will get the stimulus credited to them on their 2020 taxes. It is possible that for some, due to income increasing modestly from 2018 to 2019, and if their stimulus was calculated from 2018 (the lower income year), then they got more stimulus than intended, and will pay back the overage on the 2020 tax return. Clear as mud? Yes. Let us just sum that up with – the stimulus can be either a plus or a minus to your 2020 tax return. Many will have a change of $0, but there will be a few taxpayers who need adjusting on their tax returns.

Without a lot of knowledge on the subject, we expect (although this may be hopeful expectations) to see a 2020 tax form added that goes something like this:

• what was your AGI in 2019?
• What is the stimulus allowable with that AGI?
• How much stimulus was actually received?

If the difference is not 0 – summon Rumpelstiltskin to torment your family for 3 days! Well.. maybe not exactly that last part, but the difference between the allowed and actual will then create additional tax (bad thing) or a credit (good thing) on the tax return – but 0 being most common and the expected result, meaning no extra bad or good thing on your 2020 tax return, it will be business as usual.

Double Checking Your Stimulus Check

For those that want to go the extra mile and check to see if they might have to pay any part of it back, here is a link to a calculator to help you gauge what your stimulus ‘should’ be vs what you actually got: https://molentax.com/stimulus-check-calculator/   You will need access to both your 2018 and 2019 tax returns. Do the calculation for each, and compare it to the stimulus you received. The 2019 information is the ‘true’ number test.

To recap from our starting questions:

1. Will the stimulus check affect 2020 taxes?

Yes. The stimulus can either add increase or decrease the tax due on your 2020 tax return.

2. Is it a loan on future taxes I have to pay back?

No. Although, it may seem that way for a few who got a larger stimulus than intended.

3. I haven’t gotten my stimulus check, am I out of luck?

No. Worst case scenario, you WILL get the stimulus credited to your 2020 tax return.

Working through the kinks

There are some more troubling hurdles that are still being worked through. One of the methods that was added for identifying those who get the stimulus was social security. There are a fair amount of people living on social security with no other income and have no requirement to file a tax return. This caused some people who have already passed away to be issued a stimulus. There is also a challenge with folks who were married as of the last tax return filed, be in 2018 or 2019 – and were no longer married or even talking when the stimulus was sent. Only one bank account, or address got the whole stimulus. Not all the fine print is written yet to answer these challenges, but they are starting to. There is a decent list of frequently asked questions with answers on the IRS website here: https://www.irs.gov/coronavirus/economic-impact-payment-information-center#returning

As of this writing, question 13, and questions 68-69 offer some guidance to these challenges. The really tricky one is going to be the divorced situation – as while someone can easily write a check to the other for their allowed amount, we don’t yet know how that will line up with the IRS check and balance computer system. You get $2,400.00 which is $1,200.00 for you and $1,200.00 for your now ex spouse. You give your ex spouse the $1,200.00. When you file your 2020 tax return and mark down that you only received $1,200 and file your tax return. Our concern at this time is: will the automated system reject your tax return because that information doesn’t match what is officially on record? It is an uncomfortable limbo that no one wants to be in.

When will we know for sure?

It is possible we will get answers to this before the end of the year – as that list of frequently asked questions has grown considerably – but I’m not overly optimistic. The trickier the situation, the longer it takes for the ‘fine print’ to be available. I am sure there are plenty of other tricky situations regarding the stimulus. I would first check that FAQ section on the IRS website linked above to see if your answer may already be available. We will have questions that we’ll have to wait until the beginning of next year to truly find the answers – and being in limbo for so long is no fun.

Charles Steinmetz
Senior Tax Advisor