Jan 19, 2022
As we advised in Tax Tip 20-04 , significant additional disclosure and filing requirements for trusts were announced in the 2018 Federal Budget and are scheduled to apply for trust’s 2021 and subsequent tax years.
In prior U.S. Tax Tips we discussed the requirements for qualified U.S. taxpayers to receive the Economic Impact Payment. The Economic Impact Payment (“EIP”) is part of the CARES Act and represents a pre-payment of a 2020 tax credit of up to US $1,200 per “eligible individual” and an addition US $500 per “eligible child.” Technically this credit will be claimed as part of their U.S. personal income tax return (if one is required to be filed).
The payment is not limited to U.S. residents but includes “eligible individuals” who live outside the United States. Many of our clients have received their payments.
We would like to provide an update and answer a question.
On June 3, 2020, the IRS released IRS Newswire IR-2020-111. The Service states that in the past two months more than 159 million Americans have received Economic Impact Payments totaling almost US $267 billion. Of the 159 million payments, 120 million were sent out by direct deposit, 35 million by check and 4 million payments were made in the form of a pre-paid debit card. One message our readers should take out of this is that U.S. persons, living outside the United States should consider maintaining at least one U.S. domestic bank account with which they can transact with the IRS.
When these payments were first announced, there was a requirement that a prior year tax return had to be filed to receive the payment and that the taxpayer’s adjusted gross income (AGI) did not exceed a certain threshold being US $150,000 for a joint filing, $112,500 for a Head of Household filer and US $75,000 for a single filer. The IRS used the 2019 return (if filed) or the taxpayer’s 2018 filings to determine whether the “eligible individual’ was eligible for the EIP based on their prior year AGI.
Certain taxpayers, however, are not required to file returns and the IRS then provided a mechanism for those taxpayers to apply for the EIP. These would include individuals who receive benefits under the Social Security Administration, the Railroad Retirement Board, or the Department of Veteran’s Affairs.
The IRS advises that many low income taxpayers who do not usually file tax returns may register for a payment by October 15th by using the free Non-Filers tool on the IRS website (www.irs.gov).
Is it income?
Many clients have reached out to us and have asked whether the receipt of the Payment is income for tax purposes.
The payment is NOT income. It is a tax credit. Section 2201(a) of Pub. Law 116-136 (the CARES Act) amends Subchapter B of chapter 65 of subtitle F of the Internal Revenue Code of 1986 by inserting new section 6428.
New IRC §6428 2020 RECOVERY REBATES FOR INDIVIDUALS states:
“(a) IN GENERAL – in the case of an eligible individual, there shall be allowed as a credit against the tax imposed by Subtitle A for the first taxable year beginning in 2020 an amount equal to the sum of – …” (italics and bold added).
The credit allowed under paragraph (a) is coordinated with any advance refund or credit (better known as the Economic Impact Payment) under IRC §6428(e)(1) COORDINATION WITH ADVANCE REFUNDS OF CREDIT which states:
“(1) IN GENERAL – The amount of credit which would (but for this paragraph) be allowable under this section shall be reduced (but not below zero) by the aggregate refunds or credits made or allowed to the taxpayer under subsection (f).”
The legislation makes it quite clear that the Economic Impact Payment is an advance refund or credit in which the “eligible individual” shall be treated as having made a payment against the tax imposed by Chapter 1… (Chapter 1 of the Internal Revenue Code being “Normal Taxes and Surtaxes”). It is not income.
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The material provided in this U.S. Tax Tip is believed to be accurate and reliable as of the date of posting. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither Cadesky Tax nor Cadesky U.S. Tax can accept any liability for the tax consequences that may result from acting based on the contents hereof.