To clear up some misconceptions about the pandemic-related Economic Impact Payment, the Internal Revenue Service (IRS) has sent out new consumer guidance to remind Americans that the standard $1,200 is not set in stone. It says the payment amounts vary based on income, filing status, and family size.
All the reasons why
In breaking down the common scenarios, the IRS explains why the differences exist and what taxpayers should pay special attention to:
You have not filed a 2019 tax return, or the IRS has not finished processing your 2019 return
Payments are automatic for eligible people who filed a tax return for either 2018 or 2019.
More often than not, the IRS uses a taxpayer’s information from their 2019 tax return to calculate the Economic Impact Payment. If someone hasn’t filed the 2019 return yet, the IRS will use the 2018 return.
There are two important caveats there, however:
If a taxpayer has already filed for 2019, but the IRS hasn’t finished processing that return, the agency will still use the 2018 return. “Remember, the IRS accepting a tax return electronically is different than completing processing; any issues with the 2019 return mean the IRS would've used the 2018 filing,” the agency wrote.
If the IRS used the 2018 return, various life changes in 2019 would not be reflected in the payment. These may include higher or lower income or birth or adoption of a child. In that situation, taxpayers may be able to claim an additional amount on the 2020 tax return they file next year. This could include up to an additional $500 for each qualifying child not reflected in their Economic Impact Payment.
Claimed dependents are not eligible for an additional $500 payment
The general assumption that all households get a $500 check for every child is incorrect. “Only children eligible for the Child Tax Credit qualify for the additional payment of up to $500 per child,” the IRS said.
You’re not alone if that Child Tax Credit is news to you, but it’s something that the IRS found puzzling to some, so officials wanted to clear the air on what it is and how it plays out.
“To claim the Child Tax Credit, the taxpayer generally must be related to the child, live with them more than half the year and provide at least half of their support,” the IRS advises.
“Besides their own children, adopted children and foster children, eligible children can include the taxpayer's younger siblings, grandchildren, nieces and nephews if they can be claimed as dependents. In addition, any qualifying child must be a U.S. citizen, permanent resident or other qualifying resident alien. The child must also be under the age of 17 at the end of the year for the tax return on which the IRS bases the payment determination.”
Furthermore, for a child to qualify, they must have either a valid Social Security number (SSN) or an Adoption Taxpayer Identification Number (ATIN). A child with an Individual Taxpayer Identification Number (ITIN) is not eligible for an additional payment.
There’s one more wrinkle in the dependent child department. In situations where parents aren’t married to each other and do not file a joint return, they cannot both claim their qualifying child as a dependent.
For parents who claimed their child on their 2019 return, they may have received an additional Economic Impact Payment (EIP) for their qualifying child. For those who didn’t, the IRS says that those parents may be able to claim up to an additional $500-per-child amount when they file their 2020 tax return “if they qualify to claim the child as their qualifying child for 2020.”
If a dependent is a college student
Pursuant to the CARES Act, dependent college students do not qualify for an EIP, even in situations where their parents may have claimed them as dependents. As an example, the IRS lays out this scenario:
“Under the law, a 20-year-old full-time college student claimed as a dependent on their mother's 2019 federal income tax return is not eligible for a $1,200 Economic Impact Payment. In addition, the student's mother will not receive an additional $500 Economic Impact Payment for the student because they do not qualify as a child younger than 17. This scenario could also apply if a parent's 2019 tax return hasn't been processed yet by the IRS before the payments were calculated, and a college student was claimed on a 2018 tax return.”
Hang on, though -- there’s one more qualifier. If the student cannot be claimed as a dependent by their parent or anyone else for 2020, that student may be eligible to claim a $1,200 credit on their 2020 tax return next year.
Claimed dependents are parents or relatives, age 17 or older
“If a dependent is 17 or older, they do not qualify [for] the additional $500,” the agency notes. “If a taxpayer claimed a parent or any other relative age 17 or older on their tax return, that dependent will not receive a $1,200 payment. In addition, the taxpayer will not receive an additional $500 payment because the parent or other relative is not a qualifying child under age 17.”
But in situations where the parent or other relative cannot be claimed as a dependent on the taxpayer's (or anyone else's) return for the 2020 tax year, that parent or relative may be eligible to individually claim a $1,200 credit on their 2020 tax return filed next year.
Past-due child support was deducted from the payment
Probably the most unexpected twist to the Economic Impact Payment is that the amount is offset only by past-due child support. The Bureau of the Fiscal Service is supposed to send taxpayers who fall under that category a notice if an offset occurs. Breaking it down a little further, the IRS offers this explanation:
“For taxpayers who are married filing jointly and filed an injured spouse claim with their 2019 tax return (or 2018 tax return if they haven't filed the 2019 tax return), half of the total payment will be sent to each spouse. Only the payment of the spouse who owes past-due child support should be offset.”
This whole child support issue has proven to be problematic. The IRS says it’s not perfect, but it’s working with the Bureau of Fiscal Service and the Office of Child Support Enforcement to resolve any issues related to this as quickly as possible.
“If you filed an injured spouse claim with your return and are impacted by this issue, you do not need to take any action. The injured spouse will receive their unpaid half of the total payment when the issue is resolved. We apologize for the inconvenience this may have caused,” the agency said.
Garnishments by creditors reduced the payment amount
If you’re someone whose paycheck is being garnished by creditors, any and all Federal tax refunds -- including Economic Impact Payments -- are not protected. By U.S. law, once proceeds are deposited into a taxpayer's bank account, creditors can garnish those to satisfy any debt.
If all else fails
As hard as the IRS has tried, it’s possible that mistakes have been made. However, the agency is committed to clearing things up in the 2020 tax return. By that time, tax preparers should have the situation well enough in hand to help guide consumers through these minefields.
“In many instances, eligible taxpayers who received a smaller-than-expected Economic Impact Payment (EIP) may qualify to receive an additional amount early next year when they file their 2020 federal income tax return,” the IRS reminded taxpayers.
“Everyone should keep for their records the letter they receive by mail within a few weeks after their payment is issued. When taxpayers file their return next year, they can claim additional credits on their 2020 tax return if they are eligible for them.”