Being a CPA, of course I aim to minimize my tax bill and qualify for any tax advantage available. Doing anything less would be doing myself a disservice. That said, I’m here to admit to making a major blunder that has cost my family $2,400 (opens in new tab) of tax-free stimulus check money.
I couldn’t know it at the time I filed my returns (in late February), but being diligent and filing early went from making us fully eligible for stimulus checks to completely ineligible with the click of a mouse. At the time, the coronavirus hadn’t yet shuttered businesses, schools and countless other organizations nationwide. In fact, the full brunt of the economic pain we’re experiencing now hadn’t yet surfaced and forced Congress’ hand toward issuing the largest stimulus bill seen in American history.
As a result, I didn’t know filing early would harm us. Rather, conventional wisdom always recommends it — even with a delayed filing deadline to July 15.
Stimulus Check Limitations and Jumping the Gun
As many have come to learn, certain stipulations apply to who can qualify for this money. Namely:
- Single filers who made $75,000 or less in adjusted gross income will receive $1,200. The amount phases out between this level and $99,000.
- Married couples who made $150,000 or less will receive $2,400, plus $500 per dependent child. These figures phase out between this level and $198,000
- Head of Household filers will receive $1,200, as well as $500 per dependent child if they made $112,500 or less. These figures phase out between this level and $146,500.
- All income figures are based on 2018 tax returns unless you have already filed your 2019 tax return.
My mistake came on the last item. In 2018, my wife and I lived in New Orleans where she was a full-time medical resident and I worked for a public utility as a financial analyst. Combined, our income was below the threshold for a married couple. So, we would have qualified for $2,400, based on our 2018 tax return. However, after my wife graduated in the summer of 2019, we decided to relocate to the San Francisco Bay Area for better career opportunities, educational options for our future children, and to be closer to my wife’s family in time for us to welcome our first child.
In the second half of 2019, our incomes jumped significantly to compensate for the dramatically higher cost of living. Net-net, we haven’t yet begun to make significant financial progress, due in part to needing to begin repaying my wife’s recently refinanced student loans (opens in new tab) and her opting to work part-time so she can spend more time with our son.
While we certainly won’t complain about the higher incomes we began earning in 2019, because of the coronavirus we are a single-income family for the time-being. Current circumstances have kept many medical personnel from performing non-essential services (opens in new tab) in an effort to free up space and supplies for coronavirus patients. My wife’s specialty largely falls into this category.
Of course, we had no idea any of this would transpire. Therefore, we didn’t realize when we filed our 2019 return that this new adjusted gross income would result in ineligibility for the stimulus checks.
Don’t Let Our Misfortune Be Yours
As stated above, when the IRS calculates the amount of your check, they look at three pieces of information:
- Your tax filing status.
- The number of "qualifying" children you have (generally, 16 years old or younger).
- Your adjusted gross income (AGI).
If your adjusted gross income rose between 2018 and 2019, you might consider hitting pause on filing your tax return. In the event you have not filed your 2019 return, the IRS will be forced to use your 2018 return to calculate your payment. So, if you haven’t already filed your 2019 return and find yourself in our position, just wait.
Conversely, if you fall into the opposite situation (higher, disqualifying adjusted gross income in 2018 but lower, qualifying in 2019), file your return immediately. Even if you need to file an amended return because of some minor error, you still want the lower adjusted gross income documented for the IRS to calculate your stimulus check eligibility.
The IRS plans to disburse funds in the coming weeks and will calculate your stimulus check accordingly. After receiving your stimulus check, then let loose with the 2019 tax return. If you have a refund coming your way, you’ve essentially earned two rounds of stimulus for yourself — something that can serve as particularly useful if you find yourself down one income stream (or two) or with a reduced level of pay.
One area of confusion that has just been cleared up: Would you need to repay any funds sent to you in an incorrect amount (or at all) as a result of using your reported income from your 2018 or 2019 returns now? The answer is NO, you have no obligation to pay that money back. The IRS in late April issued guidance in a Q&A on its site (opens in new tab) stating that any amounts received this year based on income reported on your 2018 or 2019 returns when your 2020 return would have made you ineligible or paid less will NOT need to be repaid.
Per the IRS Q&A: I received an additional $500 in 2020 for my qualifying child. However, he just turned 17. Will I have to pay back the $500 next year when I file my 2020 tax return?
No, there is no provision in the law requiring repayment of an Economic Impact Payment. When you file next year, you can claim additional credits on your 2020 tax return if you are able to eligible for them, for example if your child is born in 2020. But you won’t be required to repay any Payment when filing your 2020 tax return even if your qualifying child turns 17 in 2020 or your adjusted gross income increases in 2020 above the thresholds listed above.
Likewise, as the Q&A highlights, in the situation where your 2020 income is below the threshold, you will be able to claim the tax credit on your 2020 return. You will not receive the stimulus payment this year, but you would next year as part of your normal tax return filing and refund process. (For more, please see Will You Have to Pay Back Any of Your Stimulus Check?)
Why Living Within Your Means and Having a Financial Cushion are Important
Thankfully, we will manage on one income, though we won’t have a significant amount of money to take advantage of any market pullback as we might have liked. When news first struck about the effects of this virus and our usual daily life hadn’t yet been interrupted, we saw an opportunity to buy index funds on Robinhood (opens in new tab) or one of its best alternatives (opens in new tab) for a steep discount. Maybe, we would even snag some cheaper tax-advantaged investments (opens in new tab) in our son’s 529 account we just opened in January.
Instead, circumstances didn’t agree and we found ourselves grateful for having our young family together and healthy, my steady job I can perform remotely, and a lifestyle allowing us not to dip into our financial safety net.
When this passes, as part of our efforts to draft and implement an estate plan, we will likely apply for quotes on term life insurance coverage through companies like Fabric Life Insurance (opens in new tab) or Haven Life insurance (opens in new tab), both of which require in-person medical exams to get the most competitive rates. Clearly, these medical visits would qualify as non-essential services and be prohibited at the moment due to social distancing guidance.
In short, while the stimulus money would have been useful — it is free money, after all — we unfortunately will not qualify. We will continue to plan the best we can for our financial future and prepare for anything unexpected which might come our way in the future. For now, we’ve been fortunate to manage within our capabilities and aim to enact our plan as soon as we are able when this pandemic subsides.
The Bottom Line on When to File Your Tax Returns
If you find yourself in a similar financial situation as my family but have not yet filed your 2019 return, I strongly suggest waiting to file until you see the stimulus money land in your bank account. Once that happens, file your 2019 tax return, because then you will be eligible for your tax refund (if you will receive one this year) and also lessen the risk someone will fraudulently claim your refund before you. And if you have the opposite situation, file as soon as possible.
Riley Adams, CPA, is originally from New Orleans but now lives in the San Francisco Bay Area, where he works as a senior financial analyst at Google. He also runs the personal finance site called Young and the Invested (opens in new tab), a website dedicated to helping young adults invest, manage and plan their money with confidence.
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