26 January 2022

FAQs address calculation and reconciliation of recovery rebate credit

By Paul Bonner
January 14, 2022

The IRS on Thursday issued a fact sheet (FS-2022-04) of frequently asked questions (FAQs) intended to help taxpayers and their return preparers calculate the recovery rebate credit for 2021 tax returns.

The recovery rebate credit for the 2021 tax year, as for 2020, must be netted against any economic impact payment (EIP) a taxpayer (and/or spouse, if filing jointly) received during the year. The 2021 EIP was the third such payment, which the IRS distributed in March through the end of the year. The previous two EIP rounds occurred in 2020 and are reconciled against a recovery rebate credit for that year's tax return. Individuals eligible for the EIP or recovery rebate credit who did not receive an EIP may claim the full amount of the credit on their return.

In most cases, the 2021 EIP or recovery rebate credit amount is $1,400 for each eligible individual, or double that amount for married couples filing jointly where both spouses are eligible (a married couple filing jointly can both qualify if one spouse had a valid Social Security number (SSN) and one spouse was an active member of the U.S. armed forces at any time during the year), and $1,400 for each qualifying dependent claimed on the individual's return. Both taxpayers and dependents must have a valid SSN (other than in the case of the armed-forces exception) or, for dependents, an adoption taxpayer identification number.

The definition of qualifying dependents for the 2021 EIP/recovery rebate credit includes all properly claimed dependents, such as college students, parents, and other qualifying relatives, not just, as in 2020, those who were children under age 17.

The 2021 EIP/recovery rebate credit has the same income phaseout thresholds as for 2020, $75,000 for single filers and $150,000 for married couples filing jointly. However, the phaseout ceiling is lower, $80,000 for single and $160,000 for married filing jointly. In 2020, the EIP/recovery rebate credit was reduced by 5% of the amount by which adjusted gross income (AGI) exceeded the applicable threshold, meaning that, for a single individual, the $1,200 maximum payment/credit was fully phased out at an AGI of $99,000 and for a married couple filing jointly at $198,000. Thus, the IRS points out (FAQ A1), some taxpayers who received a full or partial EIP/recovery rebate credit in 2020 might receive a lesser one or none for 2021.

The IRS previously mailed Letter 1444-C, Your Third Economic Impact Payment, reporting EIPs to taxpayers, the FAQs advise (FAQ A3). Sometime this month, the IRS said, it is also sending Letter 6475, Your 2021 Economic Impact Payment, confirming the full amount of EIPs. Taxpayers may also check their EIPs by creating or accessing an online account using the IRS's Get My Payment tool.

The FAQs also address (FAQ A2) what the IRS calls "plus-up" EIPs, additional payments sent during 2021 to taxpayers whose EIP had been based on a 2019 return or information from other government sources, where those taxpayers filed a 2020 return that allowed a greater EIP (if that return was processed by Dec. 1, 2021). Recipients of plus-up payments received a separate Letter 1444-C for them, but these payments are included on Letter 6475, the Service said.

Other issues under eight topics covered by the FAQs include:

  • How taxpayers who are not required to file a tax return for 2021 may claim the recovery rebate credit (Topic B).
  • Specific eligibility FAQs on claiming the recovery rebate credit (Topic C). These cover SSNs, such as when one spouse has an SSN and the other does not (FAQ C5). Also, they address qualifying children and qualifying relatives in detail (FAQs C7 and C8). FAQ C9 addresses when an individual was claimed as a dependent on someone else's 2020 return and did not receive a 2021 EIP but is not a dependent in 2021 (FAQ C9; the individual may claim a recovery rebate credit on his or her own return for 2021 if otherwise eligible).
  • Incarcerated and deceased and individuals (FAQs C10 and C11; see also FAQs E6 and E7 for joint filers with a deceased spouse in 2021).
  • Residents of U.S. territories (FAQ C13).
  • Whether a taxpayer may file a 2021 return with a recovery rebate credit although the IRS has not fully processed the taxpayer's 2020 return (FAQ D2 states that the taxpayer may do so).
  • Whether the IRS will figure the credit or correct an erroneous one (FAQ E2; see also Topic H, Correcting Issues After the 2021 Tax Return Is Filed).

— To comment on this article or to suggest an idea for another article, contact Paul Bonner at Paul.Bonner@aicpa-cima.com.