TAX PROVISION

Recovery Rebates

Using Tax Policy to Stimulate the Economy | March 2021

Likely the most notable provision in the ARPA is the $1,400 economic impact payment to qualified individuals. The impetus for this payment is consistent with the motivations behind the earlier $1,200 payments in the CARES Act and the $600 payments made earlier this year under the Consolidated Appropriations Act. However, significant changes have been made. While this third payment provides a more inclusive definition of a dependent, the income threshold qualifications are more restrictive in response to objections by some senators.

Phase-out of the payment for single taxpayers begins with AGI of $75,000, with complete phase-out at $80,000. Phase-out ranges for married taxpayers and heads of household are $150,000 to $160,000 and $112,500 to $120,000 respectively.

Individuals who are claimed as dependents by another taxpayer are not eligible for direct payment, but the taxpayer who claims the dependent should receive the full $1,400 for each dependent claimed on their return. The prior bills defined dependents as children age 16 or younger and provided reduced amounts for these dependents. Now any dependent with a Social Security number is included in the calculation.

A major revision from the earlier payments relates to mixed-status households. In the current round of distributions, both spouses receive $1,400 if either spouse has a Social Security number. Prior payments required each spouse to have a Social Security number. Further, the ARPA makes clear that incarcerated individuals also qualify for the recovery rebate. This conforms to court decisions on the earlier rebates which overturned an IRS interpretation that disallowed these individuals.

The payments will be based on the most recently filed income tax return. Taxpayers may be advised to delay filing the 2020 tax return if 2019 AGI is lower than the more recent year and phase-out thresholds would be operative. But this must be balanced by how many qualifying dependents are reported on each return. If the full payment is not received, any balance may be claimed as a credit on the 2021 tax return. This will occur for instance if a child is born in 2021. Conversely, any excess payment will not have to be repaid.