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CARES Act unpacked – will I get a rebate check?

A big chunk of the $2 trillion economic stimulus package was earmarked for relief checks to millions of Americans. Curious if you’ll get one? Jeffrey Levine explains what to expect.

Transcript

Tim Maurer:
Team, now we’re back with another episode of Ask Buckingham, a video podcast designed to bring clarity and calm in the midst of confusion by connecting your great personal finance questions with straightforward answers from industry thought leaders.

Tim Maurer:
Today, we’re doing another Ask Buckingham segment with Buckingham’s director of advanced planning, Jeff Levine, who has been very busy chasing down the details of the CARES Act and how it may and may not benefit you. Jeff, let’s start with what exactly is the CARES Act.

Jeffrey Levine:
The CARES Act is the third in a series of economic stimulus bills designed to help us deal with the coronavirus/COVID-19 crisis that we’re currently dealing with, and it is a massive bill that roughly had $2.2 Trillion of direct spending, along with another $4 trillion of loan guarantees, et cetera. So this is one of the largest stimulus bills. In fact, it is the largest stimulus bill that as a country we’ve ever seen.

Tim Maurer:
How about that? Well, some of that $2.2 Trillion, it sounds like it’s going to be in the form of checks or direct payments going right into people’s bank accounts who might need some additional cashflow today. Can I be expecting a check from the U.S. government?

Jeffrey Levine:
So most people, about 90% to 95% of people should expect to have some sort of payment either by check, as you mentioned, or direct deposit. But not everyone will get it. And the reason why is some people with high income in either 2018 or 2019, we’ll see the so-called recovery rebate checks phased out.

Tim Maurer:
Okay, so at what points are those phased outs kicking in?

Jeffrey Levine:
For married couples, it’s $150,000 of AGI. For single filers, it’s $75,000 of AGI. And then for head of households, it’s right smack in the middle at $112,500 of AGI. And what individuals need to realize is that unlike a lot of typical phase out ranges, which start and end at the same levels, the way the recovery rebate phase out works is everybody kind of starts with a set amount for their filing status. So married couples filing joint returns, get $2,400, 1,200 for each adult. Single filers get 1,200. 1,200 for the one adult. And then for every qualifying child you have, we add another $500 to your starting amount, if you will.

Tim Maurer:
Okay.

Jeffrey Levine:
For instance, if you have three children as a married couple filing a joint return, that would be 2,400 plus three times 500 for a total of $3,900 of starting credit. The way it then gets phased out is that for every $100 in excess of that threshold I just mentioned, you see $5 of that recovery rebate credit vanished, phased out, if you will.

Tim Maurer:
Wow. Okay. So are there any good online resources? I’m picturing an online calculator that people might be able to go to that would immediately tell them if they plugged in their income from 2018 or 2019 what they might expect to get.

Jeffrey Levine:
There are. There are a couple of them I’ve seen out there that are available on the web today. Just simply typing recovery rebate calculator will probably bring you to one or two. I would always advise people to double check and make sure that they perhaps run it through another site and make sure they get the same answer because these things were put up relatively quickly. And the other thing I would mention here too is that just simply putting in your number and your information doesn’t necessarily tell you what you should do. Because the way these recovery rebate checks work is there are a couple of quirks that people really need to be aware of to maximize their potential payment.

Tim Maurer:
Sure. And now let’s talk a little bit about timing on this. When should people expect to be getting their rebate checks?

Jeffrey Levine:
That’s a great question. As we sit here and record today, it’s the beginning of April and the Treasury Department has said they want to get these payments out within three weeks. Now, I think that’s a wonderful goal. I think that’s a little bit ambitious based upon what we’ve seen in the past. For instance, in 2008, we had a scenario where it took about two to three months. There are reports out actually today that some people may not see their payments for up to 20 weeks, so we really don’t know yet. And also there’s going to be challenges based on how people end up receiving those payments.

Jeffrey Levine:
For instance, Social Security beneficiaries, they’re going to have an account on file with the federal government that is active because they’re getting checks every month. But someone else who filed a 2018 tax return in early 2019, we may now be a year plus past when they got a refund of that direct deposit. You know, for those people that are lucky enough to get those refunds, and they may have changed bank accounts. The IRS may send a payment now to a bank account that doesn’t exist. How long is it going to take the IRS to realize the payment went to the wrong count, to get the money back, to send it in the mail? I mean it’s going to be a real challenge for a lot of people to get those payments. And unfortunately, a lot of people need that money today.

Tim Maurer:
Sure. So is there anything that U.S. taxpayers can do to help ensure that this process will be as clean as possible?

Jeffrey Levine:
I think there’s two aspects of your question, Tim. And one is, as clean as possible, meaning how do I get it as quickly as possible? And the second is, how do I get the biggest check? How can I get the biggest check? And so maybe we’ll take the second question first, which is, what can I do to get the biggest check? And the way this works is that it’s a 2020 credit that’s refundable, but it’s being paid out now in advance based on 2018 or 2019 income.

Jeffrey Levine:
For instance, if 2018 income was very high and your 2020 income now is very low, you may not actually get anything today even though you’re struggling because of that high 2018 income. What you could do for instance is if you’re 2019 income was lower, you could hurry up and file that return to make sure that you put the 2019 figure on file with the IRS and they would use that.

Jeffrey Levine:
Now conversely, let’s say you had a little bit softer year in 2018 and 2019 was a banner year, you actually might want to slow walk filing that return and making sure that IRS uses the 2018 number. And I got to say, probably people are thinking here, but yeah, but when you file your return, won’t they true all this up? Won’t you end up owing back the money? And the crazy part of this bill is no, there’s no clawback. So if you get paid money based on your ‘18 or ‘19 return and then in 2020, you’re way over the limits, like someone who just had a banner year this year compared to previous years. No, not as likely, but certainly some people will fall into that category. Then you don’t have to pay back the overage. On the flip side, if your income was high in previous years but goes low this year, the IRS will true that up when you file your tax return. So there’s a little bit of strategy there.

Jeffrey Levine:
With regard to the second part of your question, in terms of how to get the money as effectively as possible. I would say first, hopefully your accounts are up to date with the IRS in terms of where you want a direct deposit to go. And then for those individuals who may have moved within the last year, there’s actually a form that you can file, Form 8822 that is simply a form that says, hey IRS, I moved, stop sending me everything to this old address and start sending it to me here. And presumably that would include your recovery rebate check. So anybody who’s moved over the last year, I would encourage them to go online and file Form 8822 so that you can make sure IRS sends the check to the appropriate address

Tim Maurer:
Form 8822, did I get that right?

Jeffrey Levine:
That’s right, 8822. IRS Form 8822.

Tim Maurer:
And I assume then also if your bank account may have changed, let’s say you did do the direct deposit for your 2018 taxes that were payable in 2019 and you’ve changed banks since then, would that form take care of that same information?

Jeffrey Levine:
Unfortunately, not. It’s going to change your address, so at least the IRS will know where you live. So if the first payment fails, maybe they’ll send the check out afterwards once they realize that fails. The IRS will, as part of the CARES Act, there is a phone number, they’re going to start sending out notifications to people saying, “Here’s how your payment was calculated, here’s where it was sent.” And then there’ll be a number saying like, “If you have a problem with your payment, contact us.” Which kind of scares me a little bit because the IRS is not known for it’s a rapid response in terms of answering phone calls to begin with, and not their fault. They’re underfunded. They got a ton of, you know, 300 million people in the country plus that are potentially filing tax returns and so forth. So it’s a challenge in a normal time. I cannot even imagine how this is going to go.

Jeffrey Levine:
So unfortunately, I would say that if you’ve got something in 2018 that no longer works, if you can file your ‘19 return quickly and it won’t hurt you from an income perspective, meaning you won’t lose some of that credit because of the phase out of higher ‘19 income, it might make sense to file the return to get that updated direct deposit information on file with the IRS.

Tim Maurer:
Okay. So when we talk about getting your 2019 return done in time, what is in time? Do we have a particular date in the future where the IRS is saying whatever the number is by this date is how your credit is going to be handled?

Jeffrey Levine:
Tim, that would be too easy. Wouldn’t it be nice if there was just … Whatever’s on file with the IRS. Like if you’re watching this, whatever day this happens to be and you’re watching this, today is the day you want to get this done potentially if you need to get … Like there is no hard deadline. We haven’t received like, if you don’t have it in by April 20th of 2020, we’re going to go by the ‘18 return. It’s just whatever the most current return that IRS has on file. And frankly, we don’t really know how long it would be from the time that they receive it to the time that they update their systems to reflect that new information. So the bottom line is, sooner is better. Wish I could give everybody a better answer than that, but we’re just in unprecedented times. Things are changing more rapidly than I have ever seen over the course of my career. And it’s just one of those things where we’re just going to have to fly by the seat of our pants on some of this stuff and do the best we can.

Tim Maurer:
Sure. And one last question, unless of course your answer inspires another question. But what if 2018 and 2019 were both great years, but indeed it’s 2020, it’s right now and perhaps even because of the coronavirus that your income has been impacted. Now is when you need the money and it doesn’t really have anything to do with 2018 and 2019, any hope for you?

Jeffrey Levine:
The answer is yes and no. It’s one of my least favorite aspects of the bill how they went about this. If I was crafting this bill, what I would’ve done is send everybody checks. Because the whole reason you’re creating this bill is that people are struggling because of the situation. Someone who did really well in 2018, how does that help you determine whether they need assistance today, in 2020 during this … I mean, it really doesn’t. So I would have sent everybody checks and then kind of trued it up on the tax return for 2020. And by the way, people might say, “Well gee, they could never figure out how to do that. It’d be … ” No, they do it already. It’s how we deal with the premium assistance tax credits, the so called Obamacare tax credits. That’s what’s done. You front people money and you true it up on the tax return if their income is different than we thought.

Jeffrey Levine:
So I would have gone about it that way. They didn’t do that. What they did was they’ve said, if your income was high before and it’s low this year, you will ultimately be compensated for that and you will see that money increase your refund when you file your 2020 return or reduce the amount that you owe. But again, that’s a year away from now. That’s not really helping from a cashflow perspective for someone who’s worried about paying their mortgage or feeding their family or keeping the lights on today. So it’s not great news, but it will come back at some point in the future.

Tim Maurer:
Okay, so I want to make sure I clarify this. You’re saying that this is a tax credit, right? It’s not just free money, it’s a tax credit, if you will and-

Jeffrey Levine:
It’s actually your own money back.

Tim Maurer:
Gives you your own money back. And so those who had banner years in 2018, 2019 who might not have qualified for this check coming within, hopefully a matter of weeks, could still yet qualify for the credit itself if indeed they’re 2020 income is impacted, they’re just not going to get it for quite some time.

Jeffrey Levine:
That’s right. I can break this down real simply for everyone listening into kind of four possibilities. One is your income was low in 2018 or 2019, whichever is the most recent year and your income continues to be low this year. And when I say low, I just mean below your threshold, right?

Tim Maurer:
Right.

Jeffrey Levine:
And in that case, you’re going to get the check and it’s going to stay. The second possibility is the opposite. Your income was very high before, it’s very high now, you’re not going to get anything. The third possibility is your income was high before and it’s low now. Now, in that particular case, you will actually get that credit. It just won’t be until April. And the final situation would be your income was low before and is higher this year. Probably the least likely of the four scenarios. But for those people, it’s actually a real boon. They not only have the higher income year this year, but the IRS and treasury won’t clawback the overpayment made based on old income that is made today.

Jeffrey Levine:
It’s a very quirky way the law was created. And look, I’m not going to blame Congress too much on this one because they wrote an 880 plus page stimulus bill in about 10 days, and they had to get it out quick. Americans needed the money and we needed to understand what was going on. It stopped the collapse of what was going on in the market. So this was a very necessary bill. And the speed at which it was written, it’s just inevitable that some of these quirks will arise.

Tim Maurer:
Of course. Well, like you said, I kind of wish you had written this bill, Jeff, but the next best thing is at least getting you to help clarify for us what the heck is going on. So thank you very much and thank you for tuning in to this episode of Ask Buckingham.

Tim Maurer:
If you have a question that you’d like to see us address, you can do so by navigating to the website, askbuckingham.com or by emailing your question to question@askbuckingham.com or just click on the screen, it’ll take you directly to website. There are no dumb questions, but unfortunately there are plenty of poor answers out there. Our hope is that in giving you straight answers to your questions, you’ll be able to apply that knowledge in pursuit of good decision making. So please follow us. And by all means, Ask Buckingham.

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