A retired widowed engineer who typically has $120,000-plus in income got welcome news from his tax preparer. He’s getting $1,800 — Round 1 $1,200 plus Round 2 $600 of the 2020 economic impact payments — as a recovery rebate credit on his 2020 tax return. Plus he qualifies for a $1,400 Round 3 stimulus payment that’s part of the $1.9 trillion package that President Joe Biden signed into law today.
“He didn’t believe me,” says Claudia Hill, an enrolled agent in Cupertino, California, recalling his reaction when she told him the good news. Many retirees, parents of newborns, and students are all poised to get missed Round 1 and Round 2 stimulus payments on their tax returns—as well as Round 3 payments.
In the case of the retired engineer, it’s because of another tax relief provision in the March 2020 stimulus package: the one that waived required minimum distributions for retirement accounts for 2020. The Treasury Department later said that folks who had taken money out of their accounts before the law change were allowed to put it back in by August. Why didn’t the widow get the Round 1 and Round 2 stimulus payments originally? The IRS based those off of most people’s 2019 income. His 2019 adjusted gross income was $122,000, clearly over the $75,000 individual threshold for a full $1,200 payment, and well over the $100,000 level where the Round 1 payments fully phased out for individuals. So the IRS wouldn’t have automatically issued him a payment in Round 1 or Round 2. His 2020 income also would have been too much at $118,000, which included a $79,000 RMD, but he was able to redeposit the $79,000 RMD. That zeroed out his taxes (federal and California) and qualified him for the recovery rebate credit and the Round 3 stimulus payment. It also meant less of his Social Security benefits were taxable, and it knocked off Medicare premium surcharges, saving him a bundle that way too.
“There are all these unintended consequences. He’s not alone,” Hill says. “Sometimes it’s not as dramatic, but the retirees who chose to put the money back in are reaping good benefits.”
Who else is getting a tax time recovery rebate surprise? Lisa Greene-Lewis, a tax expert at Intuit’s TurboTax says that new parents (in 2020) will qualify for the recovery rebate credits on their 2020 tax return for the addition to their family. They’ll get $1,100—$500 for Round 1 and $600 for Round 2, plus $1,400 for the newborn in Round 3, for a total of $2,500. One idea: Use some or all of that money to seed a 529 college savings plan for the child. A lot of people are asking if stimulus payments are taxable, she says. The answer: No.
College students who aren’t claimed as a dependent on a parent’s return in 2020 can also claim a recovery rebate credit on their 2020 tax return. Hill has a medical school student whose parents aren’t claiming her as a dependent. She filed a 2020 return to get the $1,800 in Round 1 and Round 2 payments—and will be in line to get a Round 3 payment.
Even the dead can now get Round 1 and Round 2 payments as recovery rebate credits on their 2020 tax returns. In one case, Hill filed a final tax return for a woman who died of Covid-19 in a nursing home. Her medical bills were so high that soaked up her income (capital gains from selling her house), so she qualified for the $1,800 on the 2020 tax return. For situations like this, the recovery rebate credit isn’t automatic. “You have to ask for it,” Hill says.
Further reading: IRS Has Paid Out 26 Million Tax Refunds, Stimulus Checks Coming Soon