Tax WeekWith tax-filing season upon us, Two Cents is donning the green eyeshades and focusing on stories which will help you navigate tax preparation and make the most out of your return.Tax filing season kicked off last Friday, and it comes with an odd wrinkle: when you choose to file could be the difference in whether you receive a full third stimulus check or not. Due to a quirk in timing, the checks will be based on either your 2019 or 2020 income—so you’ll want to be strategic about which year you’ll use to maximize how much money you’ll get.
Why the timing matters
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According to the latest COVID relief proposal, the IRS will base your stimulus check on your adjusted gross income (AGI) and family size using either your 2020 or 2019 tax returns, depending on which one the IRS has on record when it’s time to cut a check.
The reason for this is that President Biden’s COVID relief legislation is expected to be signed into law by mid-March, which happens to be right in the middle of tax-filing season. As a result, there’ll be a mix of people who may or may not have filed their 2020 tax return when the stimulus payments are ready to be sent out next month when the legislation passes (whereas tax season runs until April 15, not including extensions).
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Help ensure you get your stimulus check
Knowing how the checks are calculated will help you decide the best time to file your taxes: either right away or later in March (according to the Wall Street Journal, it’s not certain exactly when the IRS would lock in 2019 income, as it could be in place just before the legislation is voted on, or once the bill is signed). Per CBS News reports:
Full $1,400 relief payments would go to individuals making $75,000 or less, while couples earning $150,000 would be entitled to $2,800 relief payments. The payments would ratchet down for incomes above those levels, phasing out entirely for single people earning $100,000 and couples earning $200,000.
The question then is: which year was worse for your income, 2019 or 2020? If you lost your job in 2019 but bounced back in 2020, you might want to hold off on filing your 2020 tax return until the legislation passes. On the other hand, if 2020 was much worse, then you’d want to file right away. In some cases, the difference can disqualify you from receiving a check at all. As an example, a person who made $100,000 in 2019 but then dropped down to $50,000 in 2020 wouldn’t get a check based on their 2019 information; yet they’d get a $1,400 check based on a 2020 return.
Your marital status can have an impact on your stimulus check, too, depending on how a marriage or divorce affects the $150,000 income threshold for couples compared to what it might be as an individual, especially if one spouse makes much more money than the other.
Another consideration is whether you have dependents, especially if they’re new from year to the next, as they also qualify for $1400 each. Further to that, unlike previous checks, adult dependents are eligible for payments this time around. In this case, you would get more money by claiming that dependent in 2020.
Will I lose money if I pick the wrong year?
Per Newsweek, it’s not yet clear that Congress will direct the IRS to back pay the difference for those that will receive payments based on their 2019 income but are eligible to receive more money based on their 2020 income.
If Congress follows suit on what they did for the first two rounds of payments, taxpayers who missed out on the full amount owed wouldn’t get the rest as a rebate until they file their 2021 tax returns early next year. If that happens, choosing a year will be a little less stark as an option, although it will be a long time before you see your money.
Either way, if 2020 qualifies you for more relief funds, it’s worth filing your taxes early. You’ll get any tax refund sooner (the IRS says that those signed up for direct deposit generally get their refunds back within 21 days), and you’ll lower the risk of identity theft in which a scammer files a phony tax return in your name using stolen personal information.