posted by: Radnor Financial Advisors
This is the first part of a series by Radnor Financial Advisors regarding the various aspects of the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act. This series will be published over the coming weeks and updates will be provided as the legislation is clarified and guidance is issued as to the mechanics of each provision.
Should you have any questions regarding the CARES Act or anything else, please don’t hesitate to reach out to us.
Individual Tax Rebates
With the passage of the CARES Act, the federal government is putting cash directly into the pockets of most Americans in the form of advanced tax rebates.
Individuals will receive $1,200 (married couples will receive $2,400) PLUS $500 per child under 17. Such payments are subject to phase-out. At the phase-out threshold, the payment is reduced by $5 for each $100 of income above the threshold. The thresholds are $75,000 for single filers, $150,000 for married couples, and $112,500 for heads of household. Individuals who are claimed as a dependent on someone else’s return are not eligible for the tax rebate.
For individual filers, the $1,200 payment is fully reduced to $0 at $99,000 (Married couples are phased out at $198,000). Note that the $5 reduction per $100 of excess income applies to the cumulative payment. For example, a married couple with one child would receive some level of payment up to an adjusted gross income of $208,000.
In order to ensure that all qualified Americans receive the stimulus funds in a short period of time, Congress is creating a refundable credit that will claimed on the 2020 tax return and advancing that credit to the present time in the form or a check or direct deposit.
Mechanically, in order to determine which taxpayers qualify for the credit, the IRS will look at each taxpayer’s 2019 tax return (or, if 2019 has not been filed, the 2018 tax return) to confirm income level and number of qualifying children. If reduction of income or the birth of a child in 2020 would result in a higher benefit than received in the advanced tax rebate payment, the difference will be reconciled in an additional tax credit on the 2020 tax return. (This is a similar concept to the reconciliation of subsidies received for healthcare insurance purchased through the Affordable Care Act.) What if income increases in 2020 enough such that the credit claimed in on the 2020 tax return is less than the advance payment received? There current legislation does not provide a mechanism for recapturing the excess payment amount.
Author: Mike Valenti, CPA, CFP®Important Disclosure Information