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Why Economic Impact Payment Could Be Different Than Anticipated

Why Economic Impact Payment Could Be Different Than Anticipated

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Why Economic Impact Payment Could Be Different Than Anticipated

Cross References • IR-2020-93, May 11, 2020

The IRS has posted information on their website giving various scenarios that explain why the Economic Impact Payment (EIP) that was received may be different than the amount that was expected.

2019 tax return not yet filed, or IRS has not finished processing the 2019 return. Payments are automatic for eligible people who filed a tax return for 2018 or 2019. Typically, the IRS uses information from the 2019 tax return to calculate the Economic Impact Payment. Instead, the IRS will use the 2018 return if the taxpayer has not yet filed for 2019. If a taxpayer has already filed for 2019, the IRS will still use the 2018 return if the IRS has not finished processing the 2019 return. The IRS accepting a tax return electronically is different than completing processing. Any issues with the 2019 return mean the IRS would have used the 2018 return to calculate the Economic Impact Payment.

If the IRS used the 2018 return, various life changes in 2019 would not be reflected in the payment. These may include higher or lower income or birth or adoption of a child.

In many cases, however, these taxpayers may be able to claim an additional amount on the 2020 tax return when it is filed in 2021. This could include up to an additional $500 for each qualifying child not reflected in their Economic Impact Payment.

Claimed dependents are not eligible for an additional $500 payment.

Only children eligible for the Child Tax Credit qualify for the additional payment of up to $500 per child. To claim the Child Tax Credit, the taxpayer generally must be related to the child, live with them more than half the year and provide at least half of their support. Besides their own children, adopted children and foster children, eligible children can include the taxpayer’s younger siblings, grandchildren, nieces and nephews if they can be claimed as dependents. In addition, any qualifying child must be a U.S. citizen, permanent resident or other qualifying resident alien. The child must also be under the age of 17 at the end of the year for the tax return on which the IRS bases the payment determination.

A qualifying child must have a valid Social Security Number (SSN) or an Adoption Taxpayer Identification Number (ATIN). A child with an Individual Taxpayer Identification Number (ITIN) is not eligible for an additional payment.

Parents who are not married to each other and do not file a joint return cannot both claim their qualifying child as a dependent. The parent who claimed the child on their 2019 return may have received an additional Economic Impact Payment for their qualifying child. When the parent who did not receive an additional payment files a 2020 tax return, they may be able to claim up to an additional $500 per-child amount on that return if they qualify to claim the child as their qualifying child for 2020.

Dependents are college students

Dependent college students do not qualify for an EIP, and even though their parents may claim them as dependents, they normally do not qualify for the additional $500 payment. For example, a 20-year-old full-time college student claimed as a dependent on his or her parent’s 2019 federal income tax return is not eligible for a $1,200 Economic Impact Payment. In addition, the student’s parents will not receive an additional $500 Economic Impact Payment because the student does not qualify as a child younger than 17. This scenario could also apply if the parent’s 2019 tax return hasn’t been processed yet by the IRS before the payments were calculated, and a college student was claimed on a 2018 tax return.

However, if the student cannot be claimed as a dependent by his or her parents or anyone else for 2020, that student may be eligible to claim a $1,200 credit on his or her own 2020 tax return.

Claimed dependents are parents or relatives, age 17 or older.

If a taxpayer claimed a parent or any other relative age 17 or older on his or her tax return, the dependent will not receive a $1,200 payment. In addition, the taxpayer will not receive an additional $500 payment because the parent or other relative is not a qualifying child under age 17.

However, if the parent or other relative cannot be claimed as a dependent on the taxpayer’s or anyone else’s return for 2020, the parent or relative may be eligible to individually claim a $1,200 credit on his or her 2020 tax return.

Past-due child support was deducted from the payment.

The Economic Impact Payment is offset only by past-due child support. The Bureau of the Fiscal Service will send the taxpayer a notice if an offset occurs. For taxpayers who are married filing jointly and filed an injured spouse claim with their 2019 tax return (or 2018 tax return if they haven’t filed the 2019 tax return), half of the total payment will be sent to each spouse. Only the payment of the spouse who owes past-due child support should be offset. The IRS is aware that a portion of the payment sent to a spouse who filed an injured spouse claim with his or her 2019 tax return (or 2018 tax return if no 2019 tax return has been filed) may have been offset by the injured spouse’s past-due child support. The IRS is working with the Bureau of Fiscal Service and the U.S. Department of Health and Human Services, Office of Child Support Enforcement, to resolve this issue as quickly as possible. If an injured spouse claim was filed with the return and the taxpayer is impacted by this issue, the taxpayer does not need to take any action. The injured spouse will receive their unpaid half of the total payment when the issue is resolved.

 

Garnishments by creditors reduced the payment amount

Federal tax refunds, including the Economic Impact Payment, are not protected from garnishment by creditors by federal law once the proceeds are deposited into a taxpayer’s bank account.33.

What if the amount of the Economic Impact Payment is incorrect?

In many instances, eligible taxpayers who received a smaller-than-expected Economic Impact Payment (EIP) may qualify to receive an additional amount when they file their 2020 federal income tax return. EIPs are technically an advance payment of a new temporary tax credit that eligible taxpayers can claim on their 2020 return. Everyone should keep for their records the letter they receive by mail within a few weeks after their payment is issued.

When taxpayers file their 2020 tax return, they can claim additional credits if they are eligible for them.

The EIP will not reduce a taxpayer’s refund or increase the amount they owe on the 2020 tax return. It is also not taxable on the 2020 return.

 

Tax Insights – July 2020

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Hobby Income

If you have income from sources other than your main job, how do you know whether it’s income from a business or hobby? The distinction between the two makes a big difference in your taxes. Look at the following nine factors when making the determination. Do you:

1. Operate in a businesslike manner? Do you keep accurate books and records? If so, you are more likely to have a business than a hobby.

2. Have expertise in the area or hire experts? If you have expertise or hire an expert, this is evidence of a business, rather than a hobby.

3. Devote a significant amount of time and energy to the activity? The more time you spend on the activity, the more likely it’s a business.

4. Expect that assets increase in value? If so, then it is likely a business.

5. Have other, similar businesses? If you have several similar activities that you treat as businesses, this activity will likely be treated that way too.

6. Have a history of profits? Too many years of losses increases the likelihood that an activity is a hobby.

7. Have large profits? If you make large profits, it is more likely a business.

8. Have other substantial income or capital from other sources? If so, that is an argument for hobby treatment.

9. Get personal pleasure or recreation from the activity? If you participate in the activity for fun, hobby treatment is more likely.

Your hobby income is taxable, but hobby expenses are limited; you can only deduct the cost of goods sold (the cost that you incur in acquiring or manufacturing your product). For example, if your hobby is making jewelry, the cost of goods sold would include the beads and other products that you purchase to make the jewelry, but not the equipment you use to make the jewelry.

You aren’t on your own figuring this out. Come see me to walk through these factors, and I’ll help you make the right determination for your tax situation.

Tax Notes

The CARES Act has a lot of little things that you can take advantage of:

• Over the counter drugs and feminine hygiene products can be paid for with your HSA.

• Taxpayers who have outstanding tax debts will have liens or levies suspended, and new delinquent accounts will not be sent to collection at this time.

• Distributions from retirement accounts will not incur the 10% penalty for certain taxpayers.

• Taxpayers can take an above-the-line charitable deduction for up to $300 in qualified cash donations.

• HDHPs can pay for COVID-19 related care without jeopardizing their status.

Tax Due Dates

• April and June estimated tax payments due – July 15

• Individual and C corporation income tax return due – July 15

Quote Corner

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty, and the pursuit of happiness.”

~ Declaration of Independence

Tax Insights – June 2020

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 Mid-Year Tax Checkup

As you complete your tax return this year, are you surprised by the amount of your balance due or refund? Many people are unpleasantly surprised by the balance due. How can you prepare so that tax time is, if not pleasant, at least less painful?

The choices you make regarding your federal income tax withholding and estimated payments can impact your balance due or refunds. The IRS developed withholding tables to assist your employer in determining the correct amount of tax to withhold from your paycheck. The good news is that you can change your withholding whenever you want. By completing a Form W-4, you can take additional withholding each paycheck to minimize your balance due. If you’re not great at saving, taking $50 out of each paycheck in the last half of the year is often easier than coming up with $600 at tax time. In much the same way, you can make an estimated tax payment during the year. This is helpful if you have extra cash during the year.

How do you determine how much to withhold or pay? Generally, taxpayers do not incur an underpayment penalty unless they have a balance due (after deductions, credits, and payments) in excess of $1,000. We know the tax rates for 2020. If you bring in your paycheck closest to July 1, you can double the income and withholding to get approximate numbers for the full year. Together, we can go through your usual deductions and credits to determine the amount that you must withhold to get to where you want to be.

Tax Notes

A health savings account (HSA) lets you set aside money on a pre-tax basis to pay for qualified medical expenses. Following are the HSA limits for 2020 and 2021:

Tax Due Dates

• April and June estimated tax payments due – July 15

• Individual and C corporation income tax return due – July 15

Did You Know?

On June 14, 1777, the Continental Congress passed the first Flag Act, declaring that “the flag of the United States be made of thirteen stripes, alternate red and white; that the union be thirteen stars, white in a blue field, representing a new Constellation.” But it wasn’t until 1916 that June 14 was officially established as Flag Day. Appleton, Wisconsin, home of the National Association of Tax Professionals, claims to have the oldest National Flag Day parade, first held in 1950.

Quote Corner

“Success is not final, failure is not fatal: it is the courage to continue that counts.” 

~ Winston Churchill

Tax Insights – May 2020

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 CARES Act Brings Relief to Individual Taxpayers

The recently passed Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provided relief to taxpayers in a number of ways. The due dates to file and pay income taxes have been extended to July 15, 2020. Taxpayers who haven’t already filed their taxes can wait until July 15, although they can file at any time. Refunds generally will be paid out within 21 days.

Most taxpayers should have also received a stimulus payment. The payment equals $1,200 for single taxpayers and $2,400 for married taxpayers who file a joint return. Those with dependent children under the age of 17, should have received an additional $500 per child. The payment phases out once income reaches $99,000 for single filers, $146,500 for head of household and $198,000 for joint filers. There was nothing taxpayers needed to do to receive this payment. It was automatic and based on what was reported on their 2019 income tax return. For those who hadn’t filed a 2019 return yet, the IRS based the payment on the 2018 return. If you haven’t received a payment, visit irs.gov and click on the Coronavirus Tax Relief link to check on the status. Tip: At the prompt, type your correct USPS address, which may differ slightly from the one used on your return. Use all capital letters.

Also new with the CARES Act, you’ll be able to take a partial charitable deduction even if you do not itemize. Generally, you must itemize your deductions to receive a tax benefit for charitable contributions. Beginning in 2020, you can make charitable contributions in cash of up to $300 without itemizing your deductions.

Interest and payments on federal student loans are suspended until September 30, 2020. You’ll not incur interest on your loans, and any payments made during this time will pay down principal. In addition, skipped payments will still count for forgiveness programs, such as income-driven repayment plans and public service loan forgiveness.

Finally, when you reach a certain age, generally 70½, you are required to take a minimum distribution from your IRA or retirement plan. If you are required to take a minimum distribution in 2020, you can choose not to without incurring a penalty. You do not have to make up the distribution in 2021.

Tax Due Dates

• Form 990, exempt organizations – July 15

• April and June estimated tax payments due – July 15

• Individual and C corporation income tax return due – July 15

Did You Know?

The first week of May is National Teacher Week. This spring especially, we appreciate the hard work our teachers do every day. 

Quote Corner

“Never underestimate the lingering effects of a dash of spontaneous comfort.” 

~ Gina Greenlee

Tax Insights – April 2020

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 Tax Notes 

The IRS advised that high deductible health plans (HDHPs) can cover the costs for testing and treatment of COVID-19 without losing their status as an HDHP. As we all deal with the pandemic, keep informed by checking the IRS website for updates.

Important Tax Information

The deadline for filing individual tax returns and paying taxes has been extended for 90 days to July 15, 2020, for all taxpayers. Ordinarily extensions only apply to the filing deadline. However, in this special case, the time to pay has also been extended. 

Penalties and interest that would ordinarily apply during this time are also waived. Stay safe, stay home, and call me to see how we can file your return while staying healthy.

Protect Yourself from Fraud and Identity Theft

Fraud and identity theft continues to increase. What can you do to protect yourself?

1. Safeguard your personal information. Keep it close. Do not give your Social Security number, credit card number, bank or other account numbers to anyone who does not need it. All of this information can be used to impersonate you.

2. Be aware of scams. Often, criminals get information simply by asking for it. Be wary of emails and phone calls asking for account numbers. If you receive an email or phone call that seems illegitimate, call the company on the phone number listed on their official website to confirm the call or email is legitimate.

3. Update your passwords frequently. Use a strong password—one that includes letters, numbers, and special characters. Longer passwords are better. Don’t use names or common words. Consider password management software to create strong passwords.

4. Use two-factor authentication, which requires an item of information that you know, and one item that is generated for you. This adds another layer of protection onto your password.

5. Protect your home wireless network by setting a password and using encryption. Consider setting up a guest Wi-Fi to avoid giving your password out to guests.

6. Back up critical information to an external hard drive or cloud account. In the event of a disaster, you’ll want to have access to this information. 

Protect yourself and your family by following these suggestions. 

Did You Know?

April 22, 2020, is the 50th anniversary of Earth Day, a time to celebrate the earth and support environmental protection. The first Earth Day is credited with launching the modern environmental movement, and is now recognized as the planet’s largest civic event. Earth Day is currently observed in 192 countries. 

Quote Corner

“April hath put a spirit of youth in everything.” 

~ William Shakespeare 

Sonnet XCVIII

Tax Insights- March 2020

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 Do You Have a Balance Due? 

If planned correctly, tax time shouldn’t have to be unpleasant. I can help you with that. If you wind up with a balance due, however, you have several options to pay your tax debt.

Pay the balance due. If you can pay either directly or via credit card, you can simply pay your tax bill and be done with it. However, if your tax bill is greater than $1,000, you might owe an underpayment penalty. 

File a return or extension and pay what you can. While filing a return or an extension does not extend the time to pay, it can help you avoid a failure-to-file penalty. The extension of time to file will give you an extra six months (generally until October 15). The underpayment penalty and interest accrue until the amount is paid. If you can’t pay the full amount by the extension date, you can request an installment agreement.

Request an Installment Agreement. With this option, you file your return and attach Form 9465, Installment Agreement Request. The IRS will notify you if the request is approved or denied. The fee for an installment agreement varies on the method of payment. The agreement allows monthly payments on the balance due. If you owe $50,000 or less, you may be able to avoid filing Form 9465 and establish an installment agreement online, even if you haven’t yet received a tax bill. Repayment periods can be up to 72 months.

Extension of time to pay. In rare instances, a taxpayer can request an extension if faced with an undue hardship (generally, a federally declared disaster, terrorist act, or military action). In these cases, the IRS will waive the penalty, but not the interest.

Penalties. When taxes aren’t paid on time, the IRS may assess penalties. If you believe you are subject to a penalty, I can help calculate the amount. 

Come see me to file a timely return, and we can plan your 2020 withholding so the 2021 tax season is a breeze!

Tax Return Due Dates

• Partnerships and S Corporations – March 16

• Individuals, Trusts and Estates, and C Corporations – April 15

• Extended due date for Partnerships and S Corporations – Sept. 15

• Extended due date for Trusts and Estates – Sept. 30

• Extended due date for Individuals and C Corporations – Oct. 15

Tax Notes

There’s a new kid on the block — Form 1040-SR. This two-page form, which can be filed by taxpayers aged 65 or older, is designed to report the most common types of income for seniors. If you’re married, either spouse can qualify you to file this simpler form.

Did You Know?

March 9 is a super moon. A super moon is when the moon is at a close approach to the earth and may look larger than usual. Early Americans referred to this full moon as the Full Worm Moon, because the soil begins to thaw, and earthworms begin to appear. The Full Worm Moon is the second of four super moons happening in 2020. Keep your eyes on the sky!

Quote Corner

“Spring work is going on with joyful enthusiasm.” 

~ John Muir

Tax Insights – February 2020

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 Extenders Bill 

In December, the president signed the Further Consolidated Appropriations Act, 2020, which contains the SECURE Act and extenders. These acts affect you in many ways. 

First, the SECURE Act provides for several changes related to retirement plans. Provided you meet the requirements, the law allows you to make contributions to traditional IRAs regardless of your age. Before the SECURE Act, you could not contribute after age 70½. Also, the law raises the age at which you must take retirement distributions from 70½ to 72. 

There are two new types of penalty-free distributions from qualified plans and IRAs for expenses related to the birth or adoption of a child, and expenses related to disasters. For expenses relating to having a child, up to $5,000 can be distributed from a retirement plan for qualified expenses. These expenses are those incurred within one year of the birth of the child, and within one year of the adoption of a child under age 18 or disabled. These distributions will still be taxed for income tax purposes, but the 10% penalty is waived.

If you are in a disaster area, and your insurance and other benefits do not cover your losses, you can now take a distribution from your retirement account to make up your losses. The distribution can be up to $100,000. It is taxed for income tax purposes, but is not subject to the 10% penalty.

The other portions of the act contain what are usually called extenders. Each year, some deductions and credits expire. Generally, last-minute legislation extends them for another year. In this case, there was no legislation in 2018. The act extends these benefits for tax years 2018, 2019, and in some cases 2020. This means that you may be able to amend your 2018 return to take advantage of these benefits. What is extended?

• The tuition and fees deduction allows an above-the-line deduction for education expenses. This is an option if you don’t qualify for the American Opportunity Credit.

• If you had cancellation of debt income from the foreclosure of your home, you may have had to include the cancellation in income. The income can now be excluded.

• Private mortgage insurance is often required if you do not make a 20% down payment on your home. It is reported on the same document on which your mortgage interest is reported. This is an itemized deduction, so if you itemized in 2018, this may impact you.

If any of these might affect you, please contact my office. We can review your 2018 return, and potentially amend it to provide a better result.

Tax Return Due Dates

• Form 1065 – March 16, 2020

• Form 1120S – March 16, 2020

• Form 1040 – April 15, 2020 

• Form 1120 – April 15, 2020

Tax Notes

Taxpayers who claim the earned income tax credit or additional child tax credit will not receive a refund before February 15, 2020. The IRS expects funds to reach debit cards and bank accounts sometime in early March. If you claim either of these credits, you can check the status of your refund on the IRS website “Where’s My Refund” sometime after February 15. You should be able to see the projected date of funding by February 22, 2020.

Did You Know?

This year, Mardi Gras is on Tuesday, February 25. It’s a celebration of the last day of Carnival, before the first day of Lent, traditionally a time of fasting for those who observe. The biggest celebrations of Mardi Gras in the United States include New Orleans, Pensacola, Galveston, and St. Louis. The first Mardi Gras celebration in the United States was in Mobile, Alabama, dating back to 1703.

2020 Client Letter

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Dear Clients,

I hope that 2019 was a fantastic year for each of you. We have been in the new office for a year now and we love our new location. We have had lots of wonderful things happen this year. We have also had some sadness. As many of you know we lost Marty March 28, 2019. We will all miss his smile and sense of humor. We have lost a few clients also, and our heart goes out to their families.

We are changing a few things at the office to make things more secure. We now have a program named Canopy that we use to upload and download your information to when you need it and can’t come into the office. We no longer send any information by emails or by faxes. When you request we will send you a link and you can get to your information at your discretion. No one else can get your link and no one will know your password, we will not know your password either. If this is not for you, you are always welcome to call ahead and ask Terri or Carla to have it ready for you. All records need my permission to leave the office, by calling ahead this will decrease your wait time.

We have a monthly newsletter we would like to email to you if you like, you can let us know when you come in if you would like it sent to you each month. It has information that you might find interesting.

Our client appreciation day is set for Thursday February 13, 2020. It is from 9am-7pm. We hope you will come by and drop off your taxes, have refreshments with us and grab a door prize. All taxes dropped off this day will qualify for 10 percent off of your regular price. If you pay by check or cash you will receive an additional 2 percent off. Credit and debit cards are at the 10 percent only as we pay fees for you to use these.

Tax Season opens up on January 20, 2020. We will start processing returns that week. You can call us to make an appointment as soon as January 20, 2020. Please make sure you have received all your documents when you call to make your appointment.
Our hours for tax season will be : Mondays, Wednesdays and Fridays 9am-5pm, Tuesdays and Thursdays 9 am- 7pm, and Saturdays 10am-3pm. We suggest you call for an appointment rather than a walk-in so that your wait time is limited.

Sincerely, Dana Hatton

Tax Insights – December 2019

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Year-End Tax Planning

As the year ends, you may be wondering what you can do to lower your taxes on your 2019 return. If you have cash on hand, there are several things that you can do to help your tax position in the new year and beyond.

  1. Charitable giving. If you itemize, you can make gifts to charitable causes. This can include cash gifts or in-kind gifts. Any donation you make before the end of the year can be taken as a 2019 tax deduction. If you don’t have quite enough in any given year to itemize your deductions, you could consider holding off on donating until after the first of the year to double up your charitable giving for the following year.
  2. Health Savings Accounts. If you have cash on hand, have a high-deductible health plan, and have not contributed the maximum to your Health Savings Account (HSA), consider maxing out your contribution. You’ll have that money for medical expenses in the new year and can deduct the after-tax contributions to your HSA. 2019 limits are $3,500 for individual coverage and $7,500 for family coverage. If you or your spouse are age 55 or older, you may be able to contribute up to $2,000 more to your HSAs. These contributions can be made up to the due date of your return.
  3. Individual Retirement Arrangements. Another option if you have cash on hand is to max out your IRAs. The rules are somewhat complex, but generally, taxpayers can contribute $6,000 to an IRA (either Roth or traditional, or a mixture). If you’re 50 or older, you can contribute $7,000. See me to determine exactly how much you can contribute. Like an HSA, contributions to an IRA can be made until the due date of the return.

If you have a business, there are even more ways to lower your tax burden for next year. Schedule an appointment before the end of the year to see if you can lower your taxes by taking action now.

Important Tax Deadlines

  • January 31 – W-2s and 1099s
  • March 16 – Partnerships and S Corporations
  • April 15 – Individuals, Trusts and Estates, and C Corporations
  • September 15 – Extended deadline for Partnerships and S Corporations
  • September 30 – Extended deadline for Trusts and Estates
  • October 15 – Extended deadline for Individuals and C Corporations

Tax Notes

An Individual Taxpayer Identification Number is issued to taxpayers who must have a tax identification number, but cannot obtain a Social Security number. Taxpayers who have an ITIN with middle digits of 83, 84, 85, 86, or 87, or who have not filed a federal return in the last three years, must renew their number this year. Come see me to renew yours to avoid delays in processing your return.

Did You Know?

December 20 is U.S. Poet Laureate Day. The current Poet Laureate of the United States is Joy Harjo, who was appointed in June 2019. She is the first Native American Poet Laureate. Her books include An American Sunrise (2019), Conflict Resolution for Holy Beings (2015), and Crazy Brave (2012).

Quote Corner

“No act of kindness no matter how small is ever wasted.”  ~ Aesop

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Richmond, VA 23113
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