Legal Alert: Recovery Rebates - Under the Coronavirus Aid, Relief, and Economic Security Act

Posted: 03/27/2020 | Creditors' Rights

The U.S. Senate and House of Representatives passed the CARES Act this week, sending it to President Trump’s desk Friday afternoon, March 27, 2020. The President is expected to sign it immediately. The CARES Act provides emergency relief from the effects of the COVID-19 pandemic.

Only one provision – the Recovery Rebates – is the subject of this Legal Alert. The Act directs the Treasury to begin advancing, by check or direct deposit, a 2020 tax benefit referred to as a “Recovery Rebate,” “as rapidly as possible” to eligible individuals. Within fifteen days of the payment, the Treasury is to mail each taxpayer a notice of the payment amount and the manner the payment was made.

Through the question and answer format below, this Legal Alert provides information on the Recovery Rebate that you could receive in the coming weeks depending on your personal situation.

Who is “Eligible” to Receive the Recovery Rebate?

An “eligible individual” is any individual other than:

  1. Persons having too much income (discussed below)
  2. “Dependents” who can be claimed on someone else’s tax return
  3. Any nonresident alien (for example, foreigners who do not hold a green card)

What is “Too Much Income” that Disqualifies an Individual from Being Eligible?

The amount that is considered “too much income” depends on an individual’s filing status and adjusted gross income (“AGI”) amount. Individuals with an AGI of no more than $75,000 (single), $150,000 (joint), and $112,500 (head of household) will receive the full Recovery Rebate. AGI levels over this limit is phased out in the amount of 5% of the excess income (or $5 for each $100 of the excess). Once AGI reaches $99,000 (single), $198,000 (joint), and $136,500 (head of household), the Recovery Rebate is completely phased out, and no Recovery Rebate will be issued.

I am an “Eligible Individual.” How Much is My Recovery Rebate?

The full amount of the 2020 Recovery Rebate is $1,200 ($2,400 in the case of a joint return), plus $500 for each qualifying child (not having reached the age of 17 and can be claimed as a dependent) and is subject to the phase-out discussed in the previous paragraph. For joint returns, the amount of the Recovery Rebate is deemed to be applied equally between the taxpayer and spouse, which should only matter if there is a change in filing status.

How is the Recovery Rebate Being Calculated Since I Don’t Yet Know what My 2020 AGI Will Be?

The Recovery Rebate is actually a refundable tax credit for your 2020 income tax return that is being advanced by the Treasury based on status and AGI on filed 2019 income tax returns, or if not yet filed, based on the 2018 income tax return. For individuals who also have not filed an income tax return in 2018, the Treasury may calculate the Recovery Rebate based on an eligible individual’s 2019 Form SSA-1099, Social Security Benefit Statement or Form RRB-1099, or Social Security Equivalent Benefit Statement (Railroad benefits).

What if My AGI Between Tax years 2019 and 2020 Fluctuates Enough to Change my Eligibility Status?

While the Treasury’s advancement of the Recovery Rebate is calculated based on your prior year AGI and filing status, the actual tax credit is based on your actual 2020 AGI once it is determined. There may be some individuals who will not receive the early payments this spring because his or her prior income was too high, but actually do qualify for the Recovery Rebate based on 2020 income. Currently, there is no system in place to prepay the credit to these individuals, but the Treasury may issue more guidance in the future. Ultimately, the credit will be available on your 2020 income tax return when it is filed, keeping in mind that the credit will be reduced in the amount of the advanced payment if you received one. Conversely, some individuals may receive a Recovery Rebate based on prior income tax returns and not be entitled to it in 2020 because his or her 2020 AGI is too high. Fortunately, the Act does not appear to require the Recovery Rebate received by the taxpayer to be repaid.

If you have questions about the information in this Legal Alert, please contact me or your Rothberg attorney to see if we can assist you.

Cindy A. Wolfer, Associate|[email protected]

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