[NOTE: this article was updated on Monday night to reflect the latest House proposal. The article previously discussed the initial House draft released Monday morning.]
On Sunday, the Senate failed to move forward on Majority Leader Mitch McConnell’s CARES Act, which in addition to its many business breaks and tax law changes, would have ordered the IRS to cut an immediate stimulus check to most American adults. We took a close look at an earlier version of the Senate stimulus package here, but as discussed below, that version was expanded and simplified.
On Monday morning, the House countered with its own 1,200 page bill, the Take Responsibility for Workers and Families Act. The bill has a number of provisions that are not found in the Senate bill, but this article will focus on the manner in which the stimulus payment in the House bill differs from the one found in the CARES Act.
Rather than bury the lede, below is a summary of the amounts you could expect to receive in the coming months under either the House bill or the Senate bill.
Next, let’s take a little deeper dive into how we came up with those numbers.
Senate Bill (CARES Act)
Using your 2019 return, 2018 return, or 2019 Social Security data, the IRS would cut you a check for $1,200 (if single/$2,400 if married filing jointly) PLUS $500 for each child under the age of 17.
Example. A is a single taxpayer. On A’s 2019 tax return, A had gross income of $50,000 and an income tax liability of $1,000. A had withholding of $1,000, reducing the net liability to zero. Despite the fact that A’s tax liability for 2019 A was only $1,000, A is entitled to receive a check for $1,200.
No payment would be made to anyone who was claimed as a dependent on another’s return in 2018 and 2019.
The payment “phases out” once your “adjusted gross income (AGI)” — think: total income minus a handful of deductions — exceeds $75,000 (if single, $150,000 if married). Once over those thresholds, you’ll lose $5 of your payment for every $100 your AGI exceeds those thresholds. So…
- If you are single with no kids and would be due a payment of $1,200, it will be wiped out completely if your 2018 AGI exceeded $99,000 (($99,000 – $75,000) * 5% = $1,200).
- If you are married with no kids and are due a payment of $2,400, it will be gone if your AGI for 2018 exceeded $198,000 (($198,000-$150,000)*5% = $2,400).
- If you’ve got kids, then obviously, it will take more income before all of the payment is wiped out. For example, a married couple with two children who is eligible for the maximum payment of $3,400 wouldn’t lose all of their payment until AGI for 2018 exceeded $218,000.
The payment, which would be made between now and December 31, 2020 — acts as an advance payment of a credit you will compute AGAIN on your 2020 tax return.
What that means is that when 2021 rolls around and you prepare your 2020 tax return, you’ll have to recompute the amount you’re owed based on 2020 data. Now, a lot of things may be different in 2020 when compared to 2018: you may have more income or less tax liability or fewer kids under age 17…you get the idea. In any event, you’ll have to compute the payment owed to you based on 2020 data, and compare it to the advance payment you actually received. If the advance payment was less than what you are owed in 2020— for example, your tax liability was higher in 2020 than 2018 or you had another child — the excess will be treated as a credit that reduces your 2020 tax liability.
If history is any indication, if the advance payment exceeds your eventual credit, you would have to pay back the excess (just ask those people who received a Premium Tax Credit based on prior years financial data that exceeded the actual credit, and were sucker-punched when they found out they had to repay the overage.) The Senate bill is silent on this issue; the House bill, as we’ll shortly see, is not.
The stimulus package under the House bill is a bit more generous than the CARES Act.
The House bill, like the Senate bill, would impel the IRS to immediately cut a check to people based on their 2019 or 2018 filing status, and then “true-up” that payment when the taxpayer files their 2020 return. Unlike the Senate bill, the House bill does not seem to accommodate a taxpayer who has not filed a return for either year, which is curious, or may just be an oversight in drafting.
The House bill payment would be $1,500 if single; $3,000 if married filing jointly PLUS $1,500 for each child (up to 3 children). Thus, a single taxpayer with no children would receive $1,500. A married taxpayer with three children would receive $7,500.
Similar to the Senate bill, any payment will be phased out when AGI exceeds a certain threshold. In the House bill, once a married couple has AGI in excess of $225,000, the entire payment will be lost. For a single taxpayer, the maximum payment will be gone once AGI exceeds $112,500).
Like the Senate bill, you will eventually have to true-up the advance payment when you file your 2020 return. On that return, you will receive a credit, and that credit will be compared to the advance payment you received in 2020. If the credit is GREATER than the advance payment, you’ll get to reduce your 2020 tax liability by the excess. If the credit is LESS than the advance credit you received, however, the House bill makes clear that you will have to recognize income in an amount equal to the excess and pay tax back to the government on that 2020 tax return. You can, however, spread the income hit out over three years.
Come 2020, the credit will be computed in the same manner as the advance payment: $1,500 for single taxpayers, $3,000 for married filing jointly, and $1,500 for child for up to three children.
Of course, at the moment, there’s no reason to be optimistic EITHER bill will get done any time soon. The Senate bill has stalled not once, but twice, and the House has yet to even set a vote on its bill. And if the stimulus payment is any indication of the philosophical and mathematical divide between the two proposals, we may be waiting awhile.
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