Recovery Rebates and the CARES Act

Posted In: COVID-19 Market Update

The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 is an estimated $2 trillion package, including nearly half a trillion dollars in individual rebate checks.

 

Nearly 900 pages in length, the CARES Act includes several unique components: “Recovery Rebates.”  It is estimated that 90% of taxpayers should receive some amount of Recovery Rebate.

 

Calculating the Amount Of A Taxpayer’s Recovery Rebate Advance
As a starting point, the CARES Act provides a refundable income tax credit against 2020 income of up to $2,400 for married couples filing a joint return, while all other filers begin with a refundable credit of up to $1,200. The credit amount then increased by up to $500 for each child a taxpayer has under the age of 17.

 

You probably noticed the “up to”s in the previous paragraph.  There’s a reason for that:  As a taxpayer’s income begins to exceed applicable thresholds, their potential Recovery Rebate Payment (their credit) begins to phase out. More specifically, for every $100 a taxpayer’s income exceeds their credit, their potential Recovery Rebate will be reduced by $5.

 

The applicable AGI threshold amounts are as follows:

  • Married Filing Jointly: $150,000
  • Head of Household: $112,500
  • All Other Filers: $75,000

 

Recovery Rebates Will Be Dispersed Based On 2018/2019 Income, but Are Actually For 2020
One of the more confusing aspects of the Recovery Rebate is that it has a bit of a ‘split personality,’ in that the initial amount paid will be based on either a taxpayer’s 2018 or 2019 income tax return (whichever is the latest return that the IRS has on file), but it will ultimately be ‘trued up’ if a taxpayer is owed money based on their actual 2020 income.

 

In other words, Congress is going to ‘front’ taxpayers an estimated amount based on their 2018/2019 incomes, but if the 2020 return shows they should get even more, they’ll get it, albeit much later.

 

Although many taxpayers are likely to see income decreases in 2020, as compared to previous years, some will surely see their incomes rise. And for some, that might mean that they get a check for a Recovery Rebate now that they don’t really ‘deserve’ based on their ultimate 2020 income.  Thankfully, there will be no clawback on the ‘excess payment,’ when they file their 2020 return.   We’ll take those broken few eggs in this omelet!

 

Where And When Recovery Rebate Advances Will Be Paid
It’s likely to be at least a month, if not more, before such payments will actually be received. The CARES Act requires that these payments be made “as soon as possible,” but early indications from the Treasury Department are that “as soon as possible” may not be until sometime in May.

 

As for where the Recovery Rebate payments will be made, it depends. It appears that individuals receiving Social Security benefits will receive their Recovery Rebate in the same account they receive their Social Security benefits. The CARES Act also authorizes Recovery Rebate payments to be made to the account into which a taxpayer’s 2018/2019 refund was deposited. Other payments will be sent to the last known address on file.

 

No doubt, this raises potential issues of its own. For instance, what happens if a taxpayer had his/her 2018 refund direct deposited into an account which is no longer active? Or what happens if a taxpayer has moved since his/her last return? In such instances, tracking down ‘lost’ Recovery Rebate payments may be a bear, as the CARES Act indicates that the IRS will provide a phone number for individuals to report such issues.  Good luck with that…

 

Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc.(APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purposes of avoiding penalties that may be imposed by law. Each tax payer should seek tax, legal or accounting advice from a tax professional based on his/her individual circumstances.
This material is for informational purposes only. Neither APFS nor its Representatives provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions. Information has been obtained from sources believed to be reliable and are subject to change without notification. The information presented is provided for informational purposes only and not to be construed as a recommendation or solicitation. Investors must make their own determination as to the appropriateness of an investment or strategy based on their specific investment objectives, financial status and risk tolerance. Past performance is not an indication of future results. Investments involve risk and the possible loss of principal.

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