The Coronavirus Aid, Relief and Economic Security (CARES) Act was passed on March 25th, 2020, with the aims at providing financial relief to individuals and businesses affected by COVID-19. Among the provisions that garner the most attention is the stimulus payments provided to individuals.
In this article, Nathan Goldman, assistant professor of accounting at Poole College of Management, outlines important tax considerations.
- What is the stimulus payment? Stimulus payments will be sent to individuals who in their 2019 federal income taxes earned less than $99,000 ($198,000) for those filing single (married-filing-jointly) tax returns. If the individual’s 2019 tax return has not yet been filed, then the government will base the payment on their 2018 income.
- Do I qualify for the stimulus payment, and for how much? To receive the stimulus payment, the individual must earn less than $99,000 ($198,000) for those filing single (married-filing-jointly) tax returns. However, the full $1,200 ($2,400) only applies to those making $75,000 ($150,000). For every $100 of income over the threshold, the individual’s stimulus payment is reduced by $5. For example, an individual with $75,100 of income receives $1,195 in stimulus payment.
- Are the thresholds based on my salary/wages? The amount of money earned is based on adjusted gross income (AGI). AGI is computed on the federal tax return and is not equal to the taxpayer’s salary or wages.
- Are there additional funds if I have a child? There is a $500 payment for every qualifying child age 16 or under. The IRS defines a qualifying child as the following: (1) the individual’s child or stepchild, foster child, or a descendent of any of these people, (2) live with the individual for more than 6 months of the tax year, (3) must not provide more than half of their support, (4) cannot file their own tax return, and (5) must be a US citizen or US resident alien and have a social security number.
- Do I need to pay taxes on this payment? This payment is not subject to income taxation. This is because this payment is an advance on a tax credit that will be taken on the taxpayer’s 2020 income taxes. Because of the nature of it being a tax credit versus a payment, it does not meet the definitions of income, and thus will not be taxed. However, because it is an advance of a tax credit, the individual needs to keep careful documentation of receiving the tax credit and making sure that it is appropriately accounted for on their 2020 tax return to avoid having to pay some it back.
- What if my income changed from 2019 to 2020? The individual also needs to keep careful track of their 2020 income. Because the stimulus payment is an advance of a 2020 tax credit, it is ultimately a function of their 2020 income. Thus, if the individual did not qualify for the stimulus payment in 2019, but does qualify based on their 2020 income, then the taxpayer may receive the stimulus payment in the form of a tax credit upon filing their 2020 taxes. Currently, the guidance is unclear what the tax treatment will be if the individual does qualify for the stimulus payment based on their 2019 income but fails to qualify based on their 2020 income
