What is Recovery Rebate Credit?

The Recovery Rebate Credit is considered a refundable credit. This means it can reduce the amount of taxes you owe on your 2020 tax return or generate a refund to you.

People who are eligible and either didn’t receive any economic impact payments (EIP) or received less than the full amounts, may claim the recovery rebate credit. To claim the recovery rebate credit, a 2020 tax return must be filed even if you are not usually required to file a return.

How Much are the Economic Impact Payments?

The first two rounds of EIP were based on your 2018 or 2019 tax returns.

• The first round of payments was US$ 1,200 (US$ 2,400 if married filing jointly) plus US$ 500 for each qualifying child;
• The second round of payments were US$ 600 (US$ 1,200 if married filing jointly) plus US$ 600 for each qualifying child;¹ and
• The third economic impact payment is US$ 1,400 (US$ 2,800 if married filing jointly) plus US$ 1,400 for each dependent.²

So, unlike the first two rounds of EIP, families will get paid for all their dependents claimed on a return and not just their qualifying children. All dependents will qualify for the extra US$ 1,400 payment regardless of their age.

In order to qualify for this, a Dependent Child:³

• Must be either younger than 19 years or a student younger than 24 years;
• US citizen, national or resident alien;
• Has Social Security Number (SSN) or adoption taxpayer identification number;
• You must provide more than half of the financial support; and
• Must live with you for more than half of the year.

If the dependent does not qualify as a dependent child, you can also check the rules for dependent relatives. Under this:

• The person should be directly related to you like parents, grandparents, etc;
• Has an SSN;
• Must live with you all year as a household member;
• Should have earned gross income less than US$ 4,300; and
• You must provide more than half of the person’s total support for the year.

Eligibility to Qualify for the Recovery Rebate Credit

• US citizen or US resident alien;⁴
• Valid SSN;
• Not a dependent of another taxpayer;
• Does not exceed the adjusted gross income (AGI) set by the IRS;
• Filed a 2020 tax return;
• If the 2020 returns are not prepared or processed yet, you must have a 2019 filed return;
• Registered for Economic Impact Payment last year; and
• Is a federal benefit recipient as of 31 December 2020.

How does this affect the 2020 Tax Filing?

As mentioned above, eligible people who did not receive full EIP can claim that by filing the 2020 tax returns. If you tick the below boxes, it is better to file your returns right away and be considered for a higher EIP.(5)

• Your income was lower than the 2019 income;
• You had a child in 2020;
• You got married in 2020; and
• You were claimed as a dependent on 2019 return but not anymore in 2020’s return.

If you were unable to receive the EIP as you or your spouse did not have a valid SSN and you have received that now, then you can claim recovery rebate by filing your 2020 tax returns. Please note that the SSN received should be valid for employment.⁶

Example:

Anna filed a joint return along with her partner Danny. Their combined AGI for 2019 was US$ 200,000. As the income is above the married filing joint (MFJ) limit, they did not receive EIP1 and EIP2 payments.

However, the situation for 2020 changed due to a decrease in both their income. The combined AGI for 2020 was US$ 90,000. They also had a new member to the family named Alex. As such, they qualify for a full recovery rebate credit and the credit will be:

$2,800 + $1,400 (for the dependent) = $4,200 recovery rebate credit

In case your situation is quite opposite to what is listed above, that is, your income was higher in 2020, you got a divorce or you can't claim a dependent, you can wait until you receive the stimulus check. When you don’t file your 2020 returns, your EIP will be based on your 2019 returns providing you a little more rebate than you would have received based on your 2020 returns.

CAUTION: If you expect to pay taxes on your 2020 returns, we suggest you contact us for tax help before taking any actions.

TIP: If you’re expecting a 2020 refund, then we recommend waiting to file the returns and get the benefit of a higher rebate.  

How does the Credit affect Tax Refund or Amount Owed?

The recovery rebate credit will either increase your refunds or decrease the balance you owe to the IRS. The amount you receive as credit will be added to your refunds or applied to any tax owed.

If you require assistance with deciding your action plan or completing your US tax returns, reach out to us via our website. Taxably’s specialist tax practitioners have extensive experience in providing exceptional client services.