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COVID-19 advance tax credit payments: good, bad & ugly

Uncle Sam shuffling money-no border

We're a third of the way to coronavirus relief checks. Last night (March 25), the Senate approved the massive measure, which includes in its 880 pages payments of $1,200 per person and $500 per dependent child. (More on this in a minute.)

The bill, known as the Coronavirus Aid, Relief and Economic Security (CARES) Act, now goes to the House for approval. There may be some procedural stumbling blocks, but it's expected to pass there, probably by voice vote to avoid the congregating caused by a roll call on the chamber's floor. That probably will happen Friday.

Then it heads to the White House, where the last time anyone checked, Donald J. Trump said he would sign it.

UPDATE, March 27, 2020: The CARES Act did clear the House by voice vote this afternoon and was signed into law by Donald J. Trump a short time later. 

UPDATE, March 28, 2020: This Internal Revenue Service assures us that it will get more guidance out to us as soon as it can. 

So hang tight. A bit of money is coming our way.

But, as with most things tax, there's some good, bad and definitely ugly components. Here's a look at some of them, in the ever-popular questions and answers format, as we wait.

How much will I get?
Yep, this is the biggie. The CARES Act's magic number is $1,200. That's the maximum check amount for an individual. It's $2,400 for married couples who file jointly. And each dependent child nets you $500 per youngster, no limit on your family size. This is good. Not great, but definitely good.

I heard there are limits. How does that work?
Yeah, you saw that word maximum, didn't you? That basically means that if you make more money, you'll get a smaller check. That's bad for some folks.

The payments start phasing out for single taxpayers with adjusted gross income (AGI) more than $75,000; $112,500 for head of household filers; and $150,000 for married couples who file a joint return.

You won't get any COVID-19 relief check if your AGI tops $99,000 as a single filer; $146,500 if you're a head-of-household; or make $198,000 and file joint return with your spouse.

There isn't, however, any limit on the number of qualifying child dependents that can net you $500 each. Good again.

What do I have to do to get my check?
Just wait. The Internal Revenue Service is in charge of distributing the checks based on your most recent tax return filings.  For the most part, this is good in that you have one less thing to deal with right now.

The payment process will begin with the IRS examining your 2019 tax return that you filed earlier this year. Don't freak out if you haven't filed yet. In these cases, the tax agency will go back to your 2018 return you sent in last year.

If you didn't have to file a Form 1040 in either year because all your income was nontaxable Social Security, the IRS will turn to the Social Security Administration for information. The amount of coronavirus relief check then will be based on your latest Form SSA-1099, Social Security Benefit Statement.

If you had a tax refund or Social Security benefits directly deposited, that's what will happen to your relief check. If you had it mailed, that's what will happen here, too.

As for those snail-mailed checks, if you moved since you last filed, well your check will be delayed. The IRS is going to send any mailed check to your last address that it has on file and if that's an undeliverable one, it will go back to Uncle Sam.

However, there is a backstop procedure. Treasury also must send out notices before the checks are sent. These will be by U.S. Postal Service mail to your last known address. If you gave your post office forwarding info, that notice should get to you.

When you get the notice, it will tell you how the virus relief check was/will be made, how much you should get and will have an IRS phone number that you can call if you didn't get your proper payment.

While this distribution system will work for the vast majority of those eligible for the payments, some no doubt will fall through the cracks. That's likely to be individuals with very low incomes who didn't have to file a return.

We'll have to wait for IRS guidance on the exact check delivery program. For now, though, it looks like bad news for folks who are eligible for a payment but aren't in the agency's usual tax filing and refund delivery system. They'll have to way until 2021 for their money. Sorry, and more on the advance credit/filing process a few questions down.

How soon will I get my check?
The plan is to start issuing the check as soon as the CARES Act becomes law. So hypothetically the process could start next week. Realistically, though, it could be weeks before checks show up.

We're talking as millions of households eligible for this payment. Last year, the IRS processed almost 156 million returns. So even though they are now in the agency's computer system, it will take a while to access the necessary data for the checks' distribution.

Officially, the legislation says the Treasury Secretary shall see that the payments are made "as rapidly as possible." And while it has no firm, or even suggested, check delivery start date, it does say that the checks must be sent by Dec. 31, 2020.

Right now, government officials are saying that three weeks is the earliest that checks could show up in bank accounts of folks who got refunds directly deposited. Double that, at least, if you get your check in your curbside box.

And while I don't want to harsh your excitement about the checks, the realist in me says don't be surprised if some folks' COVID-19 payments don't show up until the holidays.

Is my COVID-19 payment taxable income?
This is definitely good news. No, you won't have to report the coronavirus check as income on your 2020 tax return you file next year.

However, you will have to account for it on next year's return.

The virus relief payment technically is an advance tax credit. That means that you will have to report the amount on your 2020 return and calculate whether you received the proper amount this year.

What is an advance credit and what does that mean to my filing process?
A tax credit, as long-time readers already know, is the best tax benefit. It provides you a dollar-for-dollar offset of any tax you owe.

The COVID-19 check is similar to the Affordable Care Act's (ACA) advance premium tax credit (PTC) that millions have used to pay for their health insurance. With this Obamacare tax credit, you get the money up front to pay for the health policy you bought via the Marketplace.

But as some ACA PTC situations have shown, life circumstances and income amounts change from one tax year to another and can affect your credit eligibility.

As for the COVID-19 payments, you may have more or less money in 2020 or a larger or smaller family than you did in 2019 or 2018. Those changes will affect the amount of credit for which you're eligible.

Either way, you'll have to figure on your 2020 return the payment owed to you based on 2020 data. Then you'll compare it to the advance payment you actually received and reconcile any differences when you file your taxes next year.

One good thing about this advance credit 2020 reporting process is that the truing up of an advance credit will mean that anyone who missed out on the payment this year can claim it when they file a return in 2021.

So take note of the check amount you get. I suspect that like the ACA's Form 1095-A to use in reconciling advance PTC amounts, Uncle Sam will send out a form with the COVID-19 payment amount. But just in case, I'd save a digital or, if you're old-school like me, also a paper copy of the credit amount.

Will I have to pay back a COVID-19 credit overpayment?
This shouldn't be an issue for many folks, but since we're talking taxes, it could happen. This is one of the places where things definitely are good, bad and, in some cases, ugly.

During the COVID-19 credit reconciliation process while filing your taxes next year, you could find that your payment this year was less than what your 2020 returns says you should get. No problem and good. You'll get the extra as a tax credit against your 2020 tax liability.

But what if you got more this year than you'll eventually qualify for in 2020? Will you have to pay it back? Right now, that's definitely a potentially a bad situation. It's also an open question that could get ugly.

The law as written reads (to some) like the credit must be paid back, as is the case with the ACA PTC. While the bill expressly cites some of the new business tax credits as refundable, meaning you could get money back even if you don't owe, there is no such specific reference in the legislative language to this individual relief payment being a refundable credit. The CARES language is likely to stay that way since Congress doesn't want to keep bouncing the bill back between the House and Senate; time is of the essence.

A Senate Finance Committee working paper, however, refers to the credit as refundable, comparing it to the Earned Income Tax Credit (EITC). The Senate document also says that taxpayers who find they got more this year than what is figured on their 2020 return won't have to pay back that prepaid excess.

Not to be overly cynical, since 2021, the year that taxpayers will face this possibility in doing their 2020 taxes, isn't a federal election year, that implied payback provision might hold. But I suspect that because of these extraordinary circumstances, Uncle Sam will find a way, either through subsequent legislation or, more likely, Treasury/IRS guidance and clarification, to just take the hit from any overpayments this year and let folks keep any extra COVID-19 money they got.

Either way, as the IRS and possibly Congress again sort this out, it will be fun, at least for tax watchers if not affected taxpayers.

I know. Coronavirus relief payment discrepancies are something to worry about next year. No one is going to turn down a payment now on the chance that it could be too much with regard to their 2020 earnings. But I thought you might want a bit of advance warning.

I'm out of a job because of COVID-19. Will I get even more financial help?
People who are unemployed would get an extra $600 per week for up to four months, on top of any state unemployment benefits they receive. This provision is designed to fully make up for wages workers lost due to coronavirus-related layoffs.

$1,200 really isn't that much when I look at all my monthly bills. Is there other help?
There's some relief for folks who have student loans. The bill would let certain borrowers delay making their federal student loan payments without penalty until Sept. 30. Essentially, the CARES Act extends the Education Department's plan already instituted to deal with the coronavirus crisis. It also suspends collection actions on defaulted debts, including wage and tax refund garnishment.

Some lawmakers had pushed for full federal student loan forgiveness or nationwide rent freeze mandates. Look for these proposals to resurface in future COVID-19 relief packages.

If you find yourself really strapped, CARES says you can take a coronavirus-related early distribution from a retirement plan even if you're younger than the tax code's allowable retirement withdrawal age of 59½. Under this allowed COVID-19 withdrawal provision, which is capped at $100,000 for tax year 2020, you won't face the usual early distribution 10 percent penalty.

That's a qualified good, as you really shouldn't be tapping your retirement accounts. But I know sometimes life makes us make such hard choices.

Also note that you'll still owe tax on the money you take out early. But the bill does let you spread the income over three years for tax payment purposes, starting with your 2020 return. You also can avoid any income tax issues if you repay the COVID-19 distribution to your retirement plan within three years.

I own a small business. What relief does CARES give my company?
As expected, major industries get millions in relief. The Treasury Department has a pot of $500 billion it can make as loans to struggling industries like the airlines, and even cities and states.

There are, however, some provisions that will help smaller businesses, too. The screenshot below of MSNBC coverage has the highlights

COVID19 CARES Act small business provisions

Also check out EideBailly's overview of the bill's retroactive tax provisions that will allow many businesses to claim refunds and reduce 2019 and 2020 taxes.

I hope that you, your family and business are eligible for some of this relief. I know it's a trying time, but hang in there. Some help is on the way. And, of course, first and foremost, take care of yourself!

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