March 6, 2021

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How the timing of your tax return could affect your third stimulus payout

7 min read

The much anticipated third stimulus check is supposed to give people a financial lift during the pandemic. 

But it’s raising new questions during tax season, such as: Do I really need to file my 2020 federal income tax return as soon as possible to get a bigger payout? 

Increasingly, we’re hearing buzz that some people who lost their jobs or faced a significant cut in income last year might want to file their 2020 federal income tax return in February to try to engineer the biggest stimulus payment possible for the upcoming checks. 

The dollar amount of your stimulus check is bigger, after all, if you have a lower income in a given tax year. The first two stimulus programs — and the third — offer a smaller payout — or phase out altogether — once your income hits a set threshold.

The earlier you file, the theory goes, the easier it will be for the Internal Revenue Service to base the anticipated third stimulus payment on your 2020 income in time for any possible rollout of checks in late March. Congressional Democrats have an incentive for passing a stimulus plan in the coming weeks, given that millions would lose unemployment benefits by April without another stimulus package.

Before you rush, though, you should understand that the stimulus package isn’t a done deal. And frankly, this isn’t a strategy for everyone. 

Did you face a financial setback in 2020? 

Is it to your advantage to have the IRS look at the 2019 tax return? Or the 2020 income? Everyone’s situation is different. 

The IRS is able to use information, including your income, from your 2019 return to calculate the next Economic Impact Payment, if your 2020 tax return isn’t filed and processed by the time the IRS starts issuing the third stimulus payments.

The third stimulus payment is based on such things as whether you’re filing single or married filing a joint return; how many dependents you have, and your adjusted gross income.

Mind you, the $1.9 trillion coronavirus relief plan continues to be debated in Congress and we don’t know the exact income limits or possible restrictions for who will get a check.

The third stimulus plan calls for payouts of up to $1,400 for singles and up to $2,800 for married couples. 

President Joe Biden’s plan also calls for giving an extra $1,400 for dependents, regardless of age. The proposal calls for additional payments to go to all dependents, not just children 16 and younger.

Even so, some might look at the possibility of another stimulus check as another incentive for doing your taxes ASAP. 

A hand holding a small American flag and a stimulus check from the U.S. Treasury.

“It does seem possible that some taxpayers could increase the amount of their third round of stimulus payments by filing their 2020 tax returns early,” said Mark Luscombe, a certified public accountant and principal federal tax analyst at Wolters Kluwer Tax & Accounting.

“Under the proposed language of the House Ways & Means Committee bill,” he said, “the IRS is directed to use 2020 return information rather than 2019 return information in determining that amount of the advance payments if that information is available.” 

Millions of people, of course, were out of work in 2020 as efforts to limit the spread of the virus temporarily shut down or reduced hours at restaurants, theaters, shopping malls, amusement parks and other places of business. 

When filing taxes early could work

The file-early deal could work if you made good money in 2019 but had a rougher financial year in 2020. 

If a single taxpayer had $100,000 of adjusted gross income for 2019 but only $75,000 of adjusted gross income for 2020, for example, he or she would be better off filing a 2020 tax return earlier, Luscombe said. 

By filing earlier, he said, the taxpayer would receive the third stimulus payment based on that 2020 tax return.

Biden is backing a Democratic stimulus bill that would provide $1,400 stimulus checks to all individuals making under $75,000 a year or $150,000 for married couples filing joint returns. That threshold is the same that it was for the first two Economic Impact Payments. 

The stimulus payments, again under this latest proposal, would be gradually reduced for singles with an AGI between $75,000 and $100,000 and married couples who are joint filers with an AGI between $150,000 and $200,000.

But some earlier discussion explored the possibility of limiting the next round of stimulus payments to those making a limited amount of money. There had been talk of providing the full stimulus amount to those making $50,000 or less for single people and $100,000 or less for married couples.

Matt Hetherwick, the director of individual tax programs for the Accounting Aid Society in Detroit, said it’s hard to judge how filing earlier could work for you until actual legislation passes Congress and is signed into law by the president. 

By filing a 2020 tax return earlier, Hetherwick said, the IRS would have current information about you that might be beneficial, such as the birth of a child in 2020 or the fact that you saw your income fall from 2019 to 2020. 

A reduction in income in 2020, he said, might move a taxpayer to either being eligible for the full stimulus amount or at least a partial amount.

Why some should wait to file taxes

Obviously, rushing to file a 2020 tax return now is not good strategy for everyone.

If, for example, you found a much higher paying job in 2020 than 2019, you could be better off waiting, depending on your income. Or maybe you got a big bonus in 2020.

“If a taxpayer had the opposite situation, with $75,000 of adjusted gross income on the 2019 tax return but $100,000 of adjusted gross income on the 2020 tax return, they would be better off holding off on filing their 2020 tax return to let the IRS base the advance payment on 2019 adjusted gross income,” Luscombe said. 

And are you really prepared to file a return early in the game? 

Taxpayers don’t want to rush into filing a return in February or March, just to file as soon as possible, according to Ken Corbin, the new IRS chief taxpayer experience officer, a newly created position that is designed to better help the agency address taxpayer problems. Corbin also serves as commissioner for the IRS wage and investment division.

The best bet is generally to avoid any mistakes and file when the correct paperwork and information that you need are available.

If you don’t have the correct W-2 forms or 1099s now, for example, the return is likely to face delays in processing. It’s best to file when you have a complete tax return. 

“We always encourage taxpayers to file the most accurate return they can,” Corbin said.

Why you shouldn’t panic about taxes

Will you lose out on money in the long run if you delay filing a 2020 return? Not necessarily.

And that’s exactly why some of this early filer buzz might be a bit confusing.

The IRS could be able to make an additional advance payment later in 2021, Luscombe said, based on the current language in the House Ways & Means Committee bill. 

Say you received the third stimulus payment in late March based on your 2019 tax return but you had a much lower income in 2020. 

If your 2020 tax return was filed by April 15, for example, you could see a second payout for that third stimulus that would reflect all of what you were owed based on the 2020 income. 

Based on some complicated rules, Luscombe explained that the current language notes that the IRS will send you a second payment to reflect the extra money if your 2020 return is filed and processed before July 14.

If the IRS later decides to extend this year’s tax deadline beyond the April 15 filing deadline, as happened during the pandemic last year, you could have even more time, possibly up to Sept. 1. But it’s best not to bank on that extension, as currently the IRS says it has no plans to go beyond April 15. 

The deadline for the IRS to make advance payments is Dec. 31, 2021.

Again, the rules could change based on what is ultimately passed by Congress. 

Even so, some taxpayers may have other incentives for filing the 2020 federal income tax return as early as possible. 

The Recovery Rebate Credit, which can be claimed on Line 30 of the 1040, can help someone who did not receive their first or second stimulus payments yet. 

“I have already had two clients whose income went down in 2020 and we claimed part of the first two stimulus payments as a tax credit,” said George Papadopoulos, a Novi-based financial advisor and CPA, who prepares taxes for his financial planning clients. 

“Needless to say, they were pleasantly surprised and are looking for it to hit their bank account soon,” he said. 

The IRS notes that if individuals didn’t receive an Economic Impact Payment — or if they didn’t receive the full amounts — they may be eligible to claim the Recovery Rebate Credit and must file a 2020 tax return. 

“Legislation required that the second round of stimulus payments had to be issued by Jan. 15, 2021,” according to the IRS.

While some second-round Economic Impact Payments may still be in the mail, the IRS said it has issued all first and second Economic Impact Payments it is legally permitted to issue, based on information on file for eligible people.

The IRS said it issued more than 160 million stimulus payments in the first round to taxpayers across the country totaling more than $270 billion.

Since Congress enacted the COVID-19-related Tax Relief Act of 2020 in December, the IRS has delivered more than 147 million stimulus payments in the second-round totaling more than $142 billion.

As the negotiations continue relating to a third stimulus, Papadopoulos said, we don’t really know how much the payments will be and what kind of income limitations will be in place. 

We will have to wait and see. But all the stimulus talk could give many another reason to avoid waiting until the last minute to file their tax returns. 

ContactSusan Tompor: stompor@freepress.com. Follow her on Twitter@tompor.

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