One of the most frequently asked questions I have been receiving regarding the CARES Act is whether or not the $1,200 stimulus check will have to be paid back. I’ve seen many reports and rumors circulating on the web so I wanted to write an article to give a clear and definitive answer.
No, the stimulus check won’t have to be paid back. Unless the IRS comes out with guidance that speaks to the contrary, there is no mechanism in the legislation which would require taxpayers to repay their stimulus check.
If that answer isn’t clear enough then I will breakdown the legislation and explain step by step the mechanisms of the stimulus check. Warning, If you’re a tax practitioner or someone who enjoys reading legislative language then keep reading, otherwise the article will get a little complex from here on out. However, I will try my best to make this as easy to read so you can impress your Facebook friends with random tax knowledge.
2020 Recovery Rebates For Individuals
The CARES Act created section 6428 in Subchapter B of Chapter 65 of Subtitle F of the Internal Revenue Code of 1986. For tax nerds out there this is the junk draw of the Internal Revenue Code (IRC) where random provisions, which most people have never heard of, get created. I only bring this up because the real magic of the tax code happens in subtitle A.
Anyway, this new section creates a credit against taxes imposed by subtitle A for the first taxable year beginning in 2020 equal to the sum of $1,200 ($2,400 in the case of eligible individuals filing a joint return) plus an amount equal to the product of $500 multiplied by the number of qualifying children (within the meaning of section 24(c)).
In layman’s terms, this is a new tax credit created for 2020 that allows taxpayers to take a refundable credit against their taxes in the amount of $1,200 ($2,400 filing jointly) plus $500 for every child under 17 years of age (all the stuff we know already).
Advanced Refunds and Credits
If this is a 2020 tax credit then why are we getting the stimulus checks now when most of us haven’t even filed our 2019 return? Great question! The CARES Act also creates a provision that runs parallel with the 2020 tax credit which allows for an advance refund of said credit.
The advanced refund works the same way as the 2020 tax credit but it looks at your 2018 or 2019 tax return (whichever was filed last) for income limitations and number of dependents. Although the advanced refund works in congruence with the 2020 tax credit it is in fact a standalone provision.
Here’s the important part – “each individual who was an eligible individual for such individual’s first taxable year beginning in 2019 shall be treated as having made a payment against the tax imposed by chapter 1 for such taxable year in an amount equal to the advanced refund amount for such taxable year.”
What does this mean? Essentially the IRS is putting $1,200 on your tab and is refunding that money to you. Imagine deposing $12 at your bank but the computers read it as $1,200 –however you get to keep the money.
Coordination With Advance Refunds of Credit
So what happens on my 2020 return when I file for the credit? Will I have to pay back the stimulus check since it was an advance on my 2020 return? Another fantastic question! Remember, this is a brand new credit for 2020 so therefore any amount that you received is above and beyond your ordinary tax filing.
If you would have received a $1,200 refund without regard to this credit you will still receive a $1,200 refund. This money is above and beyond any amount that you would otherwise receive. One last time to be really clear – you are $1,200 richer, this is not an advance on your normal tax refund.
But how does the advance refund work with the 2020 credit? The credit for the 2020 tax year (the return you’ll file in April of 2021) will be computed and then reduced (but not below zero) by the advanced refund you received.
If your computed credit is $1,200 and you received $1,200 then your credit on your 2020 tax return will be $0. If your computed credit is $1,000 and you received $1,200 then your 2020 tax credit will be $0 (emphasis on “but not below zero”). Lastly, if your computed credit is $1,200 but you received $800 then your 2020 tax credit is $400.
2020 “True Up” But in Taxpayer’s Favor
The 2020 credit is meant as a “true up” but in taxpayer’s favor. This means that taxpayers can potentially get more stimulus money (not less) when they file their 2020 tax return.
Did you have twins in 2019 but didn’t get the two extra $500 credits? Did you not get a stimulus check because your 2018/2019 AGI was too high but you lost your job in 2020? The 2020 true up is meant to rectify all these situations which could create an unexpected benefit rather than an unexpected payback of stimulus funds.
To wrap this all up, the stimulus check won’t have to be paid back, it’s not taxable, it’s not a reduction of your 2020 refund and it’s not going to come back to bite you when you file your 2020 return.
The information contained herein is is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined though consultation with your tax adviser. This article represents the views of the author only and does not necessarily represent the views or professional advice of this publication or the author’s employer.