For a lot of folks out there, 2020 was an abysmal year financially speaking. Which, for most, means the more deductions, credits, and rebates you can scrap together — to either minimize the taxes owe or pump up your tax refund — the better.
One such credit you might not be aware of is the Recovery Rebate Credit. If you’re not familiar, here are more details on how the credit works and who qualifies…
What is the Recovery Rebate Credit
The Recovery Rebate Credit is really just another expression of the two stimulus checks — which total $1,800 for those who qualified — the federal government issued in 2020 to help those struggling financially due to the COVID pandemic crisis.
Here’s how the credit works… Let’s say the total of your two stimulus checks combined amounts to less than the recovery rebate credit amount. In that case, you may be eligible to recoup the difference when filling your 2020 tax return. Either in the form of a larger tax refund or as a lower tax bill.
Who Qualifies For the Recovery Rebate Credit?
Now you might be a little confused by this credit. If you were eligible for the full amount alloyed in the two stimulus checks, you would have taken the money and run, right?
Here’s the thing… Eligibility for two federal stimulus checks was based on your 2019 (and in some cases, 2018) tax returns. Qualifying for the Recovery Rebate Credit, however, depends on the specifics of your 2020 tax return.
Here’s a quick case study to help explain recovery rebate credit legibility…
The credit’s base amount equals the total amount of combined stimulus checks, which is $1,800. That amount is further combined for married couples filing jointly, which raises the total to $3,600. Plus, another $1,100 is added to the base for each dependent child.
So, let’s you’re married. And you and your spouse have a 10-year-old child. Thus your maximum potential recovery rebate credit amounts to $4,700.
Your Adjusted Gross Income (AGI) was $160,000 in 2019. That’s $10,000 above the $150,000 maximum annual threshold to qualify for full stimulus. Thus, your stimulus checks cuts were cut by $500 in each round of stimulus funding. Which left you $1,000 short of the $4,700 maximum potential rebate.
However, let’s say your partner was furloughed for part of 2020. As a result, your AGI for 2020 is was only $120,000. Obviously, this drops you well below the $150,000 maximum annual income threshold.
You’re now eligible to recapture the $1,000 credit you missed out on in 2020. And that credit can either be used to reduce your taxable income or added to your income tax refund.
The graphic below illustrates the equation…
Wondering if You Qualify for the Recovery Rebate Credit?
If you didn’t claim the full stimulus, if new dependents joined your household, or if your employment status changed in 2020, there’s a good chance you’re eligible for the credit. And I recommend you get in touch here for a FREE consultation!