The Coronavirus Aid, Relief, and Economic Security Act (CARES Act; P.L. 116-136), which was signed into law by President Trump on March 27, 2020, includes direct payments to individuals—referred to as "2020 recovery rebates." This Insight provides a brief overview of these direct payments. (These payments are virtually identical to those included in bill text circulated on March 22, 2020.)
The 2020 recovery rebates equal $1,200 per person ($2,400 for married taxpayers filing a joint tax return) and $500 per child. These amounts phase down for higher-income taxpayers. These payments are structured as tax credits automatically advanced to households in 2020 if they filed a 2019 income tax return and will be received as a direct deposit or check by mail. If a 2019 return has not been filed, rebates will be advanced automatically based on 2018 return information.
Otherwise eligible individuals who did not file a 2019 or 2018 income tax return will generally not receive the benefit in 2020. In order to receive the benefit in 2020, these individuals will need to file a 2019 (or 2018) income tax return. Alternatively, they can file and claim this benefit on their 2020 tax return next year.
The credit equals $1,200 per person ($2,400 for married joint filers) for eligible individuals. Generally, an eligible individual is any individual excluding (1) nonresident aliens, (2) individuals who can be claimed as a dependent by another taxpayer, and (3) an estate or trust.
Individuals eligible for the credit will receive an additional $500 for each child that qualifies for the child tax credit—generally a taxpayer's dependent child that is aged 16 or younger. Individuals cannot receive the $500 amount for older children and adult dependents.
The total credit phases out at a rate of 5% of adjusted gross income (AGI) above $75,000 ($112,500 for head of household filers and $150,000 for married joint returns). An illustration of the amount of the rebate by income level is provided in the figure below.
As with any tax refund, these payments do not count as income or resources for a 12-month period in determining eligibility for, or the amount of assistance provided by, any federally funded public benefit program. In addition, these payments are not taxable.
The credit is a fixed amount until income reaches the phaseout level. Lower-income taxpayers with little or no income tax liability are eligible for a tax credit equal in dollar value to that received by middle-income and upper-middle-income taxpayers. Hence, as a percentage of income, this rebate is largest for the lowest-income recipients. The tax credit phases out at the upper end of the distribution, as shown in the figure above.
Estimates by the Congressional Research Service and the Tax Policy Center suggest these payments will provide significant benefits to eligible low- and middle-income households.
The law automatically advances the credit, which will be received as a direct deposit or a check by mail. The advancing provision allows taxpayers to receive this credit before 2020 tax returns are filed in early 2021.
The advanced credit amount will be estimated by the IRS based on taxpayers' 2019 income tax return information (if the taxpayer did not file a 2019 income tax return, 2018 income tax return information can be used instead). For Social Security and Railroad Retirement recipients, if neither a 2019 nor a 2018 income tax return were filed, the laws allows the IRS to use information from their 2019 Social Security or Railroad Retirement Benefit Statement (SSA-1099 or RRB-1099, respectively). To expedite payments, the law allows the recovery rebates to be delivered electronically to any account which the taxpayer had authorized to receive a tax refund or other federal payment on or after January 1, 2018. Otherwise, paper checks would be issued.
If, when taxpayers file their 2020 income tax returns in 2021, they find that the advanced credit is greater than the actual credit, then they would not be required to repay the excess credit. In contrast, if the advanced credit is less than the actual credit, then taxpayers would be able to claim the difference on their 2020 income tax returns.
Under current law, taxpayers with gross income less than the standard deduction amount are not required to file a federal income tax return. In addition, public cash assistance for low-income populations, such as Supplemental Security Income, is generally not considered gross income under a limited general welfare exclusion. Hence, many low-income individuals and families whose income is largely from public assistance may not have filed a 2018 or 2019 income tax return. As such, these individuals and families would not receive these rebates in 2020, unless they filed a 2019 or 2018 return, which both policymakers and the IRS are encouraging people to do.