Recovery Rebates

The Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted on March 27, 2020.  The law includes a provision to provide recovery rebates for certain taxpayers. 

The recovery rebates will be sent to eligible taxpayers by the IRS without taxpayers needing to take any action.  The law directs the IRS to send the recovery rebates as soon as possible, and the IRS indicated in a news release that it plans to begin distribution of the recovery rebates in the next three weeks. 

Recovery rebates will be paid via direct deposit to a bank account for taxpayers who have previously provided bank information on their tax returns for the direct deposit of refunds.  For other taxpayers, the IRS will generally send recovery rebates by check.  However, in a news release, the IRS indicated that it might create a portal to allow taxpayers to provide their banking information to the IRS online so that such taxpayers can receive the recovery rebates via direct deposit.

Taxpayers who do not receive a recovery rebate from the IRS and are otherwise eligible for one will be able to claim the recovery rebate as part of the 2020 federal income tax return. 

The recovery rebate is $1,200 for individuals.  For married couples, the recovery rebate is $1,200 per spouse for a total of $2,400.  In addition, for every child under the age of 17 qualifying for the child credit, the recovery rebate is increased by $500.  (No additional recovery rebate is available for children 17 or older or other dependents.)

The recovery rebate is subject to a phaseout that begins at $75,000 of adjusted gross income for single individuals, $112,500 for heads of household and $150,000 for married couples filing joint returns.  The phaseout is computed as 5% of the amount by which a taxpayer’s income exceeds the threshold.

For the purpose of the phaseout computation, the taxpayer’s 2019 adjusted gross income will be used, if the taxpayer has already filed his or her 2019 federal income tax return.  If not, the taxpayer’s 2018 adjusted gross income will be used to compute the phaseout. 

Taxpayers who receive a recovery rebate will not be required to repay the recovery rebate when they file their 2020 federal income tax returns.  If a recovery rebate is based on a taxpayer’s 2018 income, the taxpayer’s 2019 and/or 2020 income could be higher; nevertheless, the taxpayer is not required to repay any of the recovery rebate, even if the higher income in 2019 and/or 2020 is over the phaseout threshold.  Similarly, if a recovery rebate is based on a taxpayer’s 2019 income, and the taxpayer’s 2020 income is higher, the taxpayer is not required to repay any of the recovery rebate, even if the higher income in 2020 is over the phaseout threshold. 

Observations:

Taxpayers who have not yet filed their 2019 income tax returns and have 2019 income that exceeds the phaseout threshold should wait to file their 2019 returns until after the recovery rebates have been sent by the IRS, if their 2018 income is lower and beneath the level at which the recovery rebate is fully phased out.

Since the phaseout reduces the recovery rebate by 5% of the excess over the thresholds, taxpayers with no qualifying children will be fully phased out at $99,000 or more of adjusted gross income for single taxpayers and $198,000 for married taxpayers filing joint returns. 

Taxpayers with income above the threshold where the phaseout begins but below the point where the recovery rebate is fully phased out will receive a partial recovery rebate.

However, for taxpayers with qualifying children, the level at which full phaseout occurs is $10,000 higher for each qualifying child.  For example, a married couple with 3 qualifying children will be fully phased out of receiving the recovery rebate when their adjusted gross income exceeds $228,000, computed as $198,000 + 30,000 ($10,000 x 3).