Many taxpayers are excited to know that Congress is on the verge of sending each American taxpayer about $1,000. As of 5:00pm, eastern time yesterday, Congress was still arguing over some details about the Coronavirus Aid, Relief, and Economic Security (CARES) Act. However, it seems that the proposed $1,200 checks for individuals and $2,400 for couples will be enacted by Congress and signed by Trump.
The proposed stimulus checks include a one-time $1,200 for each adult plus $500 for each child. The amount will be reduced based on the income of the recipient with reductions starting at $75,000 adjusted gross income for individuals and $112,000 for heads of households.
Although many seem to believe that the checks will be extra money in their pockets the unanswered questions suggest otherwise.
For example, will the stimulus checks be an advance on taxes, or will they be government “gifts” to the taxpayers? Either of these has tax consequences for the recipients.
There are three possibilities based on previous use of stimulus legislation. The first is that the checks are a credit against taxes. In other words, the checks are just an advance on the refund many Americans expect during tax season on monies withheld on their payroll checks that exceed their tax liabilities.
This is what happened in 2001. The $300 stimulus for individuals and $600 for couples were tax “credits”.
In 2008, the U.S. government gave relief to taxpayers by eliminating the first $6,000 of income before taxes kicked in. It was $12,000 for couples. The stimulus checks sent then were just refunds on monies the government was holding as part of the payroll with holdings that workers pay on each paycheck.
In other words, the 2008 stimulus checks were refunds on money the government was holding for the recipient.
The other option for the 2020 stimulus checks is that the money would be an advance on future tax payments. Under this scenario, when the recipient files their 2020 tax returns, the stimulus checks will have to be paid back as part of their taxes due. If they have a surplus in their account, for example – $3,000 – then their refund check would be $1,800 assuming that their stimulus check was $1,200.
There is also the possibility that the checks could be designated as a gift from the government. Obviously, it will come from tax monies, but it will not have to be paid back in full. However, unless Congress specifically “exempts” the stimulus payments from tax liabilities the recipient will owe taxes on the amounts they receive at the tax rate they are scheduled for.
There is also another question that some taxpayers may want to consider.
The 2020 stimulus checks are anticipated to be based on either 2018, or 2019 tax returns filed by the recipients. Because the proposed stimulus checks are tiered based on income above $75,000 will there be a “claw-back” provision? If there is one, and the recipient’s earnings for 2020 increased above the threshold, will the government demand its money back?
Because as of the writing this post Congress was still debating the provisions in the proposed legislation, the final amounts can change at any point. Additionally, the full text of the legislation has yet to be published meaning that the important questions outlined above have yet to be answered.
Many Americans believe that this is free money, but the reality will likely be something else altogether. As they say, the devil is in the details.