What is the Recovery Rebate Credit and how does it work?
The third stimulus payment was an advance payment of the 2021 Recovery Rebate Credit. If you did not receive a third stimulus payment check or an amount less than you were eligible for, you could claim the Recovery Rebate Credit on your 2021 tax return.
Since March 2021, more than 175 million third economic stimulus payments totaling more than $400 billion have been paid out. These payments were made as part of the American Rescue Plan Act (ARPA), a $1.9 trillion stimulus program designed to help the economy during the pandemic.
After the ARPA was signed into law, the IRS started sending out the third round of economic stimulus check payments to eligible individuals. On January 26th, the IRS announced that all third-round stimulus checks had been sent out; however, some individuals who qualified for the economic stimulus payments may not have gotten them at all or could have received less than they are entitled to.
Recovery Rebate Credit
The third stimulus payment was based on the previous year’s tax return AGI. If a person’s 2020 tax return had not yet been finalized, the IRS calculated the stimulus payment amount based on information from their 2019 tax return.
If your circumstances changed in 2021, such as your family size or income, you might be eligible for a larger Recovery Rebate Credit, which you can claim when filing your tax return.
For example, let’s say your earnings for the years 2020 and 2019 exceeded the threshold. However, you lost your job in 2021, and your income dropped drastically. You can now claim the Recovery Rebate Tax Credit because your income fell below the threshold.
You may also need to claim the credit if your family size increased in 2021. Families will be eligible for the additional $1,400 for each dependent that was not included in the third stimulus check payment last year.
How to Claim Your Recovery Rebate Credit
Again, to claim any part of the Recovery Rebate Tax Credit not obtained through advance stimulus payments, you must file your 2021 tax return.
You’ll need to know the total amount of your stimulus payments received, including any Plus-Up Payments. The IRS issued Plus-Up payments to everyone who received their third stimulus payment based on information from their 2019 tax return and was eligible for a larger payment based on their 2020 tax return.
If the sum of your third stimulus check and any “plus-up” payments is less than your allowed recovery rebate credit amount, then you may be eligible to claim the difference on your 2021 tax return in the form of a higher tax refund or a reduced tax bill.
This total amount of payments made to you can be found on IRS Online Account or in an IRS letter going out to all stimulus payment recipients.
Letter 6475, Economic Impact Payment (EIP) 3
The IRS is sending out Letter 6475, Economic Impact Payment (EIP) 3 to all third-round stimulus payment recipients. This letter provides the overall amount of the third stimulus payment and any plus-up payments received for the tax year 2021. If a married couple files a joint return, each spouse will receive a letter with half of the total sum.
You can use this letter to see if the Recovery Rebate Credit is available for your 2021 tax return. The credit will cover the difference between the amount you were entitled to and the amount you actually received for the third stimulus check.
Recovery Rebate Credit Amount & Eligibility
The 2021 Recovery Rebate Credit is based on the individual’s income and a number of qualifying dependents. Each eligible person can receive a credit of up to $1,400 ($2,800 for married couples filing jointly) plus an extra $1,400 for each qualifying dependent claimed on the tax return.
If you met the following criteria in 2021, you may be eligible for the recovery rebate credit:
- You must be a U.S. citizen or resident alien;
- You cannot be claimed as a dependent on another person’s tax return
- You must have a valid Social Security number (SSN)
Furthermore, to receive the full credit amount your adjusted gross income (AGI) can’t be more than:
- $150,000 for married filing jointly
- $112,500 for heads of household
- $75,000 for single filers
If your income exceeds the threshold, you may qualify for partial credit. However, you will not receive any payment if your income is more than:
- $160,000 for married filing jointly
- $120,000 for heads of household
- $80,000 for single filers
Qualifying dependents were expanded for the 2021 Recovery Rebate Credit. The credit is available to all dependents, including children over the age of 17, college students, parents, grandparents, and adults with disabilities.
In addition, unlike the first and second rounds of payments, children with Social Security numbers are eligible for payment even if both parents file their taxes using Individual Taxpayer Identification Numbers (ITINs).
How We Can Help
No matter how complicated your situation is, we’ll prepare your personal tax return with accuracy. Before we submit your taxes for you, we go over everything with you. Allow tax professionals to handle the hard work, and you can sit back and relax!
To learn more about how we can help you, contact us today to book a free consultation with one of our trusted advisors.
