Tax season officially starts Feb. 12 and you have until April 15 to file and pay taxes owed.
But there’s a wrinkle this year and it has to do with coming stimulus payments.
Lawmakers are still negotiating the details of a third stimulus plan, including how much Americans should get in this round.
One proposal would send $1,400 payments to individuals earning up to $75,000 a year and couples earning $150,000 a year. Another proposal aimed to slash that benefit to $50,000 for individuals and $100,000 for married couples.
Whatever the final number ends up being, the government will determine whether you get a check based on your adjusted gross income — from the 2019 or 2020 tax year. If you haven’t yet filed your 2020 taxes, the government will use your 2019 income to determine your eligibility to get a stimulus payment. For people who had a worse 2020 than 2019 — a job loss or hit to income — filing a 2020 return quickly would be a good idea. If the government has your 2019 return, it might miss the fact that you’ve been struggling and are eligible for stimulus.
“People should be determining whether they should file or not,” Mark Stafford, a CPA in Maryland, told Yahoo Finance.
“It would be a mistake for any person to file their 2020 tax return at this time if their 2020 income is higher than 2019,” said Stafford. “Since so many people rely on tax refunds to cover living expenses, it will be hard on them not to file and most may go forward and file and lose out on part of their third stimulus.”
This confusion is unneeded, Stafford said; he thinks the IRS should simply use 2020 to determine stimulus eligibility, a sentiment shared by Rep. Alexandria Ocasio-Cortez (D., N.Y.). “The pandemic hit in 2020,” she tweeted. “We should not use 2019 income to determine relief eligibility.”
Similarly, if you had a tough 2019 but a better 2020, you may want to wait to file, so that the IRS uses your 2019 income to determine your eligibility for stimulus.
“I already have numerous tax returns done and in holding pattern until the law is passed and by the time the law is passed, I will have close to a hundred on hold,” said Stafford. The law could pass at the end of February or in early March, depending on how smooth the process moves forward. (Enhanced unemployment benefits run out March 14, which provides somewhat of a deadline.)
Considering the economic devastation the pandemic wrought in the last year, earning more in 2020 than 2019 may sound unusual. But one notable characteristic of this recession is that certain sectors of the economy, including restaurants and hotels — with mostly low-wage workers — were more badly hurt than others. And white-collar workers were to a large degree unscathed. Stafford said the people who had a bad 2020 had a very bad 2020, while many clients made more money in 2020.
Another complication is people who get the earned income credit often file as soon as possible and use that money to pay expenses.
“The timing is going to cause some issues for my industry,” he said. “But more importantly for a lot of lower-income individuals.”
Since taxpayers can essentially choose which year the IRS uses for the stimulus payment — 2019 or 2020 — Stafford predicted more instances of creative accounting: “So many games to be played,” he said.
One interesting example is a divorced couple with children who alternates who gets to claim the kids as dependents on their tax return, since it is likely that there will be payments for dependent children in addition to individual payments.
Two of Stafford’s clients are a divorced couple. The ex-husband had the child as a dependent for 2019 and the ex-wife in 2020.
For the parent who gets to claim the child in 2020, Stafford said he will be filing as quickly as possible, so that parent can claim a dependent on their latest taxes, something that could affect this parent’s stimulus.
At the same time, he’s going to hold off on the ex-husband. “I’m not going to file for [the ex-husband] for 2020 because he had the kid in 2019, so he’ll get a bigger stimulus under the 2019 figures,” said Stafford.
“And because she didn’t get the first or second round,” he added, “She’ll get those and maybe the third payment for the kid. Anyone who trades off kids should either immediately file or definitely not file if they’re on the other side.”