What Is the Recovery Rebate Credit and How Does It Affect Me?

It’s important to understand what the recovery rebate credit is, and how it may affect you. Here’s what you should know.

Tax credits let you keep more money in your pocket come tax season – provided you’re eligible for them. The recovery rebate credit is available to all Americans who qualify for an economic impact payment (stimulus check), yet haven’t received their first, second, or both checks, or only collected a portion of the money they’re entitled to.

However, this particular tax credit is also available to Americans who might not have qualified for a stimulus check on the basis of their 2018/2019 tax returns but are eligible for one on the basis of their 2020 tax return.

Let’s dive into the details on the recovery rebate credit, and figure out whether you can claim it, how to check eligibility, how to go through the process of getting it onto your return, and what else to watch out for.

What is the Recovery Rebate Credit?

The 2020 and 2021 stimulus checks sent out as part of the coronavirus relief package are essentially cash advances on a tax credit all eligible Americans are entitled to.

Those who didn’t get their checks may potentially get a tax credit instead. Those who only received a portion of the money the government has sent out will receive the remainder in the form of a tax credit.

For most (but not all) Americans, this credit will turn into a tax refund, or bolster your existing tax refund. And for most (but not all) Americans, eligibility for both the stimulus check and the rebate credit are the same. As mentioned previously, the main difference is that the stimulus checks based eligibility on a taxpayer’s 2019 tax returns, and if these were unavailable, used 2018’s information.

The recovery rebate credit is going to be based on your 2020 return – so if the year hit you particularly hard, you may now be eligible for a tax credit you couldn’t previously claim. This is likely the most important piece of information for most taxpayers.

The same goes for dependent bonuses – taxpayers with children receive an extra $500 to $600 per dependent, but if you only just became a parent, that bonus may not have been calculated into your recent stimulus checks. This means you are eligible for a tax credit based on those dependent bonuses, instead.

Some taxpayers just flat out didn’t receive their checks. Some of them didn’t receive payments unlawfully due to being left out of the system (such as prison inmates) or being overlooked. In other cases, the IRS may have just made a mistake. As of October of last year, as many as 12 million Americans hadn’t yet received stimulus checks that they were entitled to, as a result of glitches and systematic issues.

Long story short – if you didn’t receive as much money as you were entitled to, or your circumstances have changed, and reflect eligibility for a greater economic impact payment as a result of your 2020 tax return, you may be eligible for a recovery rebate tax credit.

Eligibility for a Recovery Rebate Credit

First, you may want to check whether you have already claimed the stimulus payments referred to through the recovery rebate credit, by visiting your online IRS account. Alternatively, you can use the IRS’s online Get My Payment portal.

The IRS further clarifies that eligibility for a recovery rebate credit is affected by whether you have already received an economic impact payment. 

    • The first round of economic impact payments was $1,200, plus $500 per qualifying dependent.
    • The second round of economic impact payments was $600, plus $600 per qualifying dependent.

If you received less than the full amount, you may be eligible for a rebate minus whatever the government did send.

Eligibility for economic impact payments is dependent on multiple factors. These include:

    • Being a US citizen or resident alien in 2020.
    • Not being a dependent under another taxpayer.
    • Having a Social Security number valid for employment.

It should be noted that the economic impact payment is reduced for individuals earning an annual adjusted gross income (AGI) of more than:

    • $75,000 filing as a single individual or married filing separately
    • $112,500 filing as head of a household
    • $150,000 filing a joint return

The reduction of the payment (and credit) is equal to 5 percent of the amount exceeding the AGI limit.

Again, even if you weren’t eligible for economic impact payments as a result of your 2018 or 2019 tax returns, you may be eligible based on your 2020 tax return. Individuals who did not receive the first round of stimulus checks due to an incarceration are still eligible for a rebate credit, provided they are also otherwise eligible.

Calculating Your Recovery Rebate Credit

To calculate and claim your recovery rebate credit, you must prepare a 2020 tax return. Taxpayers who usually do not prepare returns due to their non-filing status must still file a 2020 tax return to claim this tax credit.

Calculating the credit is very simple. Both Form 1040 and Form 1040-SR for this year provide clear instructions on how to calculate the credit based on the information you have, to determine whether you’re eligible, and how much you will receive.

If you make a mistake, the IRS will try and correct it for you. This can result in a delay in processing. The IRS will send a notice explaining the changes they made to your return.

You should also be able to view your economic impact payment history through the following link. If you still have a copy, review your Notice 1444 (information for the first stimulus check), and Notice 1444-B (information for the second stimulus check).

Rebate Credits and Specific Debts

One of the major distinctions between the economic impact payments and the recovery rebate credit is that the latter is not safe against creditors, especially private debt collection, and child support garnishments.

Some taxpayers are having their tax credits claimed to pay off outstanding liabilities. This is currently legal, as there is no provision protecting this tax credit the way the stimulus checks were protected from being garnished to pay private debts.

It should be noted that the IRS is aware of this and has stated that they will not claim the credit for federal tax debts. In other words, your recovery rebate credit is safe from the IRS. It may not, however, be safe from other creditors. It is unclear whether the government will address this issue by applying garnishment protections to the tax credit as well, as it did for the stimulus checks.

For more information and help navigating taxes during COVID-19, work with Rush Tax Resolution.