You may want to file your 2020 taxes sooner than later
Clear your schedules.
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It’s Feb. 12, and that means it’s officially tax season. In case you missed the memo, the IRS delayed the start by a few weeks to catch up on some end-of-year changes.
For the procrastinators among us, who tend to dilly dally till April and then maybe even file an extension, there is one reason to get a jumpstart on the annual duty—and not just for the joy of crossing it off your to-do list. We’re talking about Economic Impact Payments, or those stimulus checks.
Beginning in April 2020, the first payments went out based on individuals’ most recent tax returns. For some, that was their 2018 return; for others, it was from 2019. Your adjusted gross income (AGI) was used to determine the amount—or whether you’d get a check at all. Eligible adults who reported an AGI between $75,000 and $87,000 received up to $1,200. The cap was higher for heads-of-households and couples, who also received $500 per eligible dependent.
The second payments, green-lit in December 2020, were based on 2019 returns. At that point, we had all filed taxes by the July 2020 deadline. Eligible adults received up to $600, plus $600 for eligible dependents.
A couple things to note: The federal government does not consider these stimulus checks taxable income. And if you received the maximum amount, the IRS says you don’t need to report these on your return.
You may be eligible for the Recovery Rebate Credit
Because the stimulus checks were based on 2018 and 2019 returns, many Americans who would have been eligible based on their 2020 reality did not receive assistance in real time. That may have been the case for those of us who lost jobs, had hours cut, or welcomed new children into our families.
Now, filers may be eligible for a Recovery Rebate Credit when submitting 2020 taxes. A credit, such as the Earned Income Tax Credit (EITC), is a dollar amount that’s subtracted from your tax bill. That’s different from a deduction (like student loan interest payments), which reduces the amount of your taxable income. This means even if you owe $0 in taxes, you can still get the credit.
Back to the Recovery Rebate Credit: You may finally get the break some Americans received months ago. The same AGI limits and dollar amounts apply, though your 2020 numbers inform your eligibility. And even if you got a direct deposit, the credit could make up for any difference if you qualify for the maximum amount.
When using online tax software, you’ll likely be prompted to answer some questions to figure out how this applies to you. That was the case when we tested TurboTax, H&R Block, TaxAct, and other platforms. Those going old-school will find this on Line 30. The IRS is encouraging everyone to e-file for a speedy process.
Keep in mind: Unemployment benefits are subject to most taxes. If you didn’t ask your state to withhold them, as an employer normally would, you might end up with a smaller-than-usual refund or even owe money. Translation: This Recovery Rebate Credit might not lead to cold hard cash, but a lower tax bill.
You can update your AGI before the next stimulus payments
Even if you already received stimulus checks that you were expecting, there’s still reason to file as soon as possible. Now there’s talk of further financial support, and while the details about the exact amount and who will qualify aren’t fully fleshed out, you may want to officially update your AGI if it’s lower than previous years.
So, if in 2020 you lost your job or were furloughed, it makes sense to prioritize the task. The same goes if you had a child or were married. Take, for example, newlywed partners with drastically different salaries. One spouse may have earned $90,000 in 2019, pushing them over the individual cap to receive any stimulus check. If the other brought in $50,000, they would receive the full individual amount. However, joint tax filers with an AGI of up to $150,000 were eligible to receive $2,400. In this instance, the married couple would both qualify for $1,200 each.
As is always the case, the sooner you file, the sooner your return can be processed. The IRS estimates that the majority of filers will receive a direct deposit refund within 21 days. Of course, if a COVID relief bill passes, that could throw a wrench in its timeline.
One last note: Perhaps you’re wondering if you’ll be penalized for receiving any checks that were larger than they were supposed to be. Not to worry: The IRS says it’s yours to keep.
Ready to cross this off your to-do list? We’ve got info on everything from the forms you need to wrangle to which tax software is best for your situation, and your options if you end up with a tax bill you can’t afford to pay by the April 15 deadline.