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The Recovery Rebate Credit. Can the IRS Keep It?

When filing your 2020 taxes, you may find that you qualify for the recovery rebate credit. A question related to the credit is on the tax forms for the year, which makes it easy for those who can claim it to not only save money on their 2020 taxes but also collect on anything extra owed to them through the various economic stimulus packages that were passed last year. However, the real question is: can the IRS keep your recovery rebate credit? In order to answer that question, we need to fully explore what it is and how it works.

What Is the Recovery Rebate Credit?

The recovery rebate credit is directly related to the CARES Act that was signed into law back in March 2020. This act provided an economic stimulus payment for qualifying U.S. citizens in order to mitigate some of the financial damage from the COVID-19 pandemic that shut down entire parts of the country, including various industries. The only caveat is that in order to get the rebate out to Americans quickly, the IRS used their tax returns for the years of 2018 and 2019. This means that some people may not have qualified for the full stimulus amount, based on their salary from those years.

How is this a problem? During 2020, plenty of people lost their jobs or were furloughed. While an increase in eligibility and payment amounts of unemployment in most states helped, many saw their overall amount of income reduced quite a bit. This means that people who were not eligible for the entire amount of the stimulus payment based on previous year’s taxes, might now be able to receive the additional amount, based on their new, reduced 2020 income.

This is why the IRS created the recovery rebate credit. The credit can be claimed on 2020 tax returns for those who did not make as much money during the year as they did prior. Thanks to the credit, people who lost income will pay less in taxes and receive some additional funds back in the form of a tax return in order to make up the difference. The credit must be claimed on a tax return in order for qualifying people to receive its full benefits.

Do You Qualify for the Recovery Rebate Credit?

The recovery rebate credit is designed for those who did not receive either of the full amounts of the economic stimulus in 2020. This includes the $1,200 per eligible people that many received in April of last year, and the $600 that was sent out by the IRS in December. Anyone who did not qualify for the full amount of either stimulus can include the recovery rebate credit on their 2020 tax return.

For the initial $1,200 stimulus payment, the threshold was $75,000 for an individual or $150,000 for a married couple without children. Anyone making more than that, as of their 2018 and 2019 tax returns received smaller stimulus amounts. For the $600 December stimulus, that amount was raised. Individuals making more than $87,000 or couples earning more than $174,000 did not receive the full amount.

However, if your situation changed between the tax years of 2019 and 2020, you may now be eligible to receive the additional portions of the stimulus that you did not get in 2020. Individuals and couples who lost income due to the economic downturn in 2020 can now claim the recovery rebate credit on their tax return. Others, such as those who gave birth to a child or adopted one in 2020, can receive the portion of the child credit that they did not receive last year, under the terms of the credit. In addition, college students who were listed as dependents on their parent’s taxes in 2018 and 2019 did not receive their stimulus amounts, but, if they are now filing individual taxes on their own in 2020, they can claim the credit.

There may be other qualifying factors as well, which is why those who think that they may qualify for the recovery rebate credit, having not received the full amount of their 2020 stimulus, should seek the help of a professional tax preparer.

Can the IRS Keep Your Recovery Rebate Credit?

Since the recovery rebate credit is applied to a 2020 tax return, thus reducing the amount of taxes owed by an individual or couple and possibly increasing the amount of their tax return, a number of questions come up, such as, can the IRS keep the credit and apply it to any previous amounts due. The answer to this question? According to the way that the law is written, the IRS cannot. While they can apply any other amounts of your tax refund and use them to offset any previous outstanding tax liabilities, they cannot do so with the amount of the recovery rebate credit.

What does this mean? For example, if you owe money to the IRS, but according to your 2020 tax return, they owe you a refund of $2,000, of which $800 includes the recovery rebate credit, the IRS can apply $1,200 of that amount to your previous balance. The $800 from the credit will be refunded to you. This allows those who didn’t receive the full amount of the economic stimulus payments in 2020 to receive any additional amounts of those funds that are owed to them.

With that said, other government creditors may step in and claim all of your tax refund. For example, if you owe money to another federal organization and they have a tax lien in place, they are entitled to keep your recovery rebate credit and the rest of your tax return. The same is true for state governments as well, such as money owed for back state taxes or other governmental debts. They can also claim your entire tax refund and the recovery rebate credit, using them to pay down the amount that you owe.

Claiming the Recovery Rebate Credit

It is necessary to claim the recovery rebate credit on your 2020 tax return if you qualify for it. However, if you have questions about who qualifies and how much of the credit you can claim, it is important to get help from a professional tax preparer. While claiming the credit won’t prevent the IRS from processing your tax return right away, they will correct any incorrect recovery rebate credit amounts, which may slow down how quickly you receive your return with the credit included. In addition, you may have other tax-related questions that only an expert can answer. For these reasons and others, you should seek the help that you need.

Contact Us Today

If you have any questions about the recovery rebate credit, need to include it in your tax filings, or owe money to the IRS and aren’t sure how to proceed, then reach out to the tax advisors at the Enterprise Consultants Group. We can answer your questions, discuss your rights, and provide actionable options. Please contact us online or at (800) 575-9284 today to schedule a free and confidential consultation to see how we can help you.

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