The information in this article is up to date and relevant for tax year 2020 (returns filed in 2021).
The Recovery Rebate Credit (RRC) was a new and important addition to the 2021 tax filing season. Here’s everything you need to know to help your clients who need to claim the RRC on their 2020 tax returns:
What is the Recovery Rebate Credit (RRC)?
The Recovery Rebate is a tax credit for taxpayers who did not receive the full amount of economic impact payments (EIP) they were eligible for under the 2020 CARES Act. It applies to both the first round of stimulus payments and the second round of stimulus payments approved in late 2020.
It is a refundable tax credit, so even if your clients are already receiving a refund, the recovery rebate credit will be added to that amount.
Which clients are eligible for the Recovery Rebate Credit?
Anyone who did not receive the full amount of economic impact payments they were eligible for can claim a Recovery Rebate Credit. Generally, clients who qualify will have undergone a life event from the 2019 to 2020 tax year that changed their eligibility or the amount they were eligible for. Situations include:
- A drop in income in 2020. If your client’s 2019 income was too high to qualify for all or part of the EIP but their 2020 income made them eligible, they may qualify for a Recovery Rebate Credit.
- Adopting or having a child in 2020. The first and second EIPs paid $500 and $600 per qualifying child respectively. Any child born or adopted in 2020 qualifies for both payments, even if they were born or adopted late in the year.
- No longer being a dependent. If your client was claimed as a dependent in 2019 but was not claimed as a dependent in 2020, they may have missed out on one or both rounds of stimulus checks. To qualify for the RRC, they must meet two requirements. First, the individual can no longer be claimed as a dependent on someone else’s tax return. Secondly, they can no longer meet the definition of being a dependent on another person’s tax return.
- Additionally, clients who did not file a tax return in 2019 may not have received either stimulus payment and therefore may qualify for a Recovery Rebate Credit even if they are not otherwise required to file a tax return in 2020.
- ITIN holders. When the first round of payments was sent to taxpayers, if either the taxpayer or spouse had an ITIN, no one on the return was eligible for a payment unless they were in the military. However, the Consolidated Appropriations Act of 2021 retroactively changed this requirement. Now if either the Taxpayer or the Spouse filing a joint return has a valid Social Security number (issued before the due date of the return including any extensions) and the other has an ITIN, the individual with a valid Social Security number will be deemed eligible for the credit. Any dependents with a valid social security number will be eligible for the full credit as well.
Note that if your client owed money in child support, all or part of their EIP may have been diverted to pay past-due child support. Therefore, they may not have received an EIP, but they are still not eligible for a recovery rebate credit.
To determine if your client is owed a recovery rebate, you’ll need to complete the Recovery Rebate Credit Worksheet for form 1040 or 1040S. This worksheet is already integrated into your 2020 TaxSlayer Pro software. It is filled out and calculated based on the amounts you enter that the taxpayers received for both payments.
It’s essential that you know exactly how much your client received in EIP throughout the year. If your client is not sure how much EIP they received, they can refer to IRS Notice 1444 and 1444-B if they received them or login or create an account at IRS.gov/account.
How do I help eligible clients get their Recovery Rebate?
After you’ve completed the Recovery Rebate Credit Worksheet, simply enter that amount into Line 30 of Form 1040 or 1040S. The amount will be added to their refund or used to offset any taxes owed.
What if my client received too much money in their economic impact payment?
If your client’s income rose significantly in 2020, they may have qualified to receive EIPs under the 2019 income but made too much to qualify under their 2020 income. In these cases, they have likely received stimulus checks already based on their 2019 tax returns, and they are permitted to keep this money. No repayment is required. If your client received EIP for a deceased individual, usually a late spouse, these payments do need to be returned. It is the responsibility of the individual to return these payments to the IRS, but you can help them by directing them to these instructions for returning stimulus payments on the IRS website.
Additionally, if your client claimed a child on their 2019 return that is no longer on their 2020 return, they may run into some issues. This is common with dependents of separated or divorced parents.
When separated parents alternate claiming a child as a dependent, the parent that claims the child on their 2020 tax return will receive the Recovery Rebate Credit. The RRC is given to the taxpayer that claims the Child Tax Credit in 2020. Whether the taxpayer is the custodial or non-custodial parent is not relevant.
It is common that the other parent or guardian received the advance economic impact payments for the child since the advance payments were made based on prior year tax returns (2019 or 2018). This does not preclude the parent/taxpayer claiming the child in 2020 from also claiming the Recovery Rebate Credit.