Didn’t receive all the stimulus money you were entitled to? You still can!
Filing your taxes may look a little different this year. But if you’re worried the extra boost in funds you received as stimulus payments will negatively impact your tax refund, rest assured that is not the case. That’s because the stimulus payments are not considered taxable income; they are advances on a tax credit created to provide relief to the many Americans impacted by the COVID-19 pandemic. That credit is called the Recovery Rebate Credit.
When you complete your tax return, you will be asked if you received both stimulus payments and what the dollar values were for each.
As you may already know, the stimulus payments were originally calculated based on your 2018 or 2019 tax data (whichever tax return was filed most recently before you received the payments). Technically, however, the payments are supposed to be reflective of your 2020 tax situation. Because 2020 tax returns had not yet been filed before the stimulus payments went out, the IRS had no way of knowing how much money you qualified to receive based on that year. Therefore, they resorted to prior year tax data.
Now that you are filing your 2020 return, you have the opportunity to reconcile that payment on your return to ensure you received the correct amount of stimulus money. The good news is if you were overpaid in stimulus funds, you will not have to pay any of that money back. It’s yours to keep.
If you were underpaid, however, filing your return gives you the chance to see if you qualify for more. In the event that you do, you’ll receive that money as part of your tax refund since the Recovery Rebate Credit is a refundable tax credit.
Why some filers see their refunds get smaller
Some DIY tax software providers automatically factor the Recovery Rebate Credit into a filer’s refund from the moment they start completing their return. Unfortunately, that method creates a false – or higher than normal – refund amount. Once the filer gets to the point of letting the software know they already received their stimulus payments, the software then removes the Recovery Rebate Credit value from the refund which dramatically reduces the amount of refund dollars the filer thought they were receiving. At that point, many filers begin to believe the Recovery Rebate Credit negatively impacted their refund when, in fact, the negative reduction was purely due to the way the software provider handled the credit.
To avoid that scenario and to not put a false refund dollar amount in front of filers, my software chooses to handle the credit differently. The Recovery Rebate Credit will not be calculated or added to your refund until you let the product know the values of what you received as stimulus payments. That includes indicating that you didn’t receive a payment at all. And that is why you should not see a reduction in your refund amount from your stimulus payments otherwise known as the Recovery Rebate Credit.
Your refund could increase after claiming Recovery Rebate Credit
While the Recovery Rebate Credit will never negatively impact your refund, it certainly can increase the amount you receive. There are several reasons in which you may receive a higher refund because of the credit. And these are good reasons to file as soon as possible so you get the money owed to you. A few of the more common situations include:
- A change in income between 2019 and 2020: If you previously did not qualify for the full stimulus payment because your 2019 income put you above the stimulus income limits, but your income in 2020 was reduced due to a job loss or decrease in pay, you may now qualify to receive the full credit amount.
- The addition of a dependent: Many individuals will qualify for additional stimulus funds when they file their 2020 returns because they had a baby or adopted a child in 2020, which gave them a new dependent to add to their tax return. Parents who claim qualifying children under the age of 17 on their return are eligible to receive extra stimulus funds. For the first stimulus payment, $500 was given for every qualifying dependent. With the second stimulus payment, an additional $600 was given for every qualifying dependent.
- Sharing joint custody of a child: If you rotate the responsibility of claiming your child on your tax return with your child’s other parent, you both may be eligible for the Recovery Rebate Credit. For instance, let’s say you filed your 2019 return claiming your child as a dependent and received stimulus funds for that child, but in 2020 it’s the child’s other parent’s turn to claim him or her, that parent would then also qualify to claim the Recovery Rebate Credit.
Additionally, maybe you got married or divorced. Perhaps you graduated college and started working, meaning you’re no longer considered a dependent on someone else’s return. Both scenarios would qualify you to claim the credit on your 2020 return. Even individuals who were working in 2019 but retired in 2020 could now be eligible for the credit if they previously weren’t due to income limitations. You may have already received your first and second stimulus payments, but did you know there’s a chance you could qualify for even more? That’s right – depending on the life changes you experienced in 2020, you may be owed additional stimulus dollars. In fact, the life changes that occurred for you in 2020 means you could be owed additional stimulus dollars. In fact, the life changes that occurred for you in 2020 could increase your entire tax refund. The quickest way to understand what is owed to you and receive your cash is to file your 2020 return. Here is a quick breakdown of why you should consider getting a jump start on filing your 2020 taxes:
1. Get your tax refund as soon as possible.
Do you anticipate getting a refund this year? If so, filing early is the right move. The sooner you file your taxes, the sooner you can get that refund money in your hands. Typically, the IRS issues nine out of 10 tax refunds within 21 days of acceptance when a filer chooses to e-file their return and opt for direct deposit. Waiting to file only prolongs you from receiving the refund dollars you deserve.
2. Your tax refund may be bigger than you thought.
Most years include at least one life change for many filers. And those life changes often lead to tax deductions and credits that can give your tax refund a boost. For example, having a baby, tying the knot (or untying the knot), buying a home, and simply sending your child off to daycare all come with big tax benefits. Before you know it, you’re e-filing your return and getting a larger refund than you expected. That’s a welcome surprise. For many filers this season, an unexpectedly larger refund brings even more relief than normal. To say that 2020 had its fair share of life changes would be the understatement of the century. So much happened last year. From COVID-19 tax implications to job loss and unemployment to student loan forbearance and stimulus payments, most filers’ tax returns will look a bit different this year. And that means your tax refund may also look a bit different. Filing early helps ensure you can quickly get your cash back in hand to help offset some of those challenges that 2020 brought.