Historic legislation passed by the Senate (S. 3548) and the House (H.R. 748) – the Coronavirus Aid, Relief, and Economic Security (CARES) Act –andsigned into law on March 27, 2020, includes the provision of one-time payments to individuals who meet certain eligibility requirements. The effectiveness of the CARES Act’s one-time infusion of financial assistance to eligible individuals will need to be assessed, as Congress works to further address the economic catastrophe confronting our nation.
COVID-19 both highlights and exacerbates the economic insecurity of millions and growing inequality in the United States. Instead of taking an approach based on the social insurance principle of universality, where such payments would be made to all, the CARES Act deploys tax policy based more on the social assistance principle of targeting. Both eligibility for, and the amount of, payments are income-tested. There are more complex dimensions to both approaches, as each has multiple goals to meet standards of fairness and efficient use of resources. The approach taken by Congress has elements of both broad distribution and progressivity.
A follow-up round of legislation might take a long-range approach with the goal of providing all with some form of assured income. Such an approach will acknowledge the need to prepare for the next virus or natural disaster by filling gaps in the nation’s current economic security infrastructure, rather than short-term damage control measures.
CARES Act Rebates
Regulations will clarify more details about provisions of the CARES Act. In the meantime, based on legislative language to-date, this summary answers the following questions:
CARES, referred to as “Phase 3,” provides what it calls “2020 recovery rebates for individuals” (amending Section 6428 of the Internal Revenue Code) as part of an estimated $2 trillion stimulus package.
The CARES Act in effect reduces federal income taxes for 2020. It provides an immediate benefit by advancing that estimated reduction to eligible taxpayers as a cash payment. A taxpayer who receives a CARES payment (i.e., an advance tax credit) will pay “normal” 2020 taxes when filing in 2021, having already received an “advance” of the estimated tax reduction.
Who will receive payments?
Full one-time payments will be made to: single taxpayers with adjusted gross incomes (AGI) of $75,000 or less; married couples filing jointly with AGIs of $150,000 or less; and heads of households (typically single parents with children) with AGIs of less than $112,500, based on 2018 or 2019 tax filings. Payments will be reduced for taxpayers with AGIs over these amounts and will be phased out completely for single taxpayers with AGIs over $99,000, joint filers with AGIs over $198,000, and heads of households with AGIs over $146,500.
Social Security (Old Age, Survivor, and Disability Insurance) beneficiaries are eligible to receive payments, if their AGIs do not exceed the above limits. As long as they received an SSA-1099 form (the Social Security benefit statement) or its equivalent, they will receive payments via the way they get their monthly Social Security benefits.
Individuals who file returns for the Earned Income Tax Credit (EITC), but do not otherwise pay taxes, are eligible.
Individuals who have not filed tax returns for either 2018 or 2019 will not be eligible to receive payments, unless they use their Social Security Benefit Statements (Form SSA-1099) as proof of earned income reported by their employers. Approximately 30 million individuals do not file federal tax returns, according to the Center on Budget & Policy Priorities.
No provision is made for recipients of other means-tested benefits to receive payments, if they do not have a Social Security number, or for those living “off the grid” in the underground economy.
Students and other adults will not be eligible if they are claimed as dependents on another taxpayer’s return. Non-resident aliens will not be eligible to receive these payments.
Eligible individuals, who have Social Security numbers, will not need to apply to receive payments.
A provision in an earlier form of the legislation, in which taxpayers with little or no income tax liability but at least $2,500 of qualifying income, would have been eligible for a minimum rebate check of $600 ($1,200 for joint filers), was removed in the final version of CARES.
The CARES Act calls for a public awareness campaign by Treasury, the Social Security Administration, and other federal agencies to provide information about the availability of rebates, including information for individuals who may not have filed a tax return for either 2018 or 2019.
Estimates by the American Enterprise Institute are that approximately 165 million individuals (93% of all tax filers) will receive some payments. (Kyle Pomerleau, AEI)
How much will they receive?
Individuals will receive up to $1,200. Married couples filing jointly will receive up to $2,400. Those amounts will increase by $500 for each qualifying child under age 17. The rebate amount will be reduced by $5 for each $100 a taxpayer’s AGI exceeds the phase-out threshold (as noted above). Rebates will take the form of credits against federal income taxes due for 2020, but their value will be paid as cash in advance. The rebates themselves are not taxable income.
The Internal Revenue Service (IRS) will base these rebates on the taxpayer’s 2019 federal income tax return, if filed. If not, IRS will use 2018 returns. Rebate amounts will be reconciled based on actual 2020 income, because they are technically advances on income tax credits for 2020. Taxpayers who receive smaller rebates than they will be eligible for based on actual 2020 income will receive the difference after filing a 2020 tax return. Overpayments of rebates due to higher incomes in 2020 will not be clawed back. Rebates are “refundable” and so will not need to be returned to the IRS by taxpayers with no 2020 tax liability to offset. (Source: The Tax Foundation)
Initial estimates are that a total of $290-310 billion in payments will be made.
When will they receive payments?
The timing of payments will depend on whether recipients have a direct deposit account with the IRS for payment of income tax refunds. Earliest payments are estimated to be made in mid-April 2020. Payments by paper checks are expected to be made months later.
The fastest payments will be made electronically to the bank accounts of taxpayers who have set up such direct deposits with the IRS. For those who do not have direct deposit accounts with the IRS, including those who are “unbanked,” payments will be made by paper checks. Payments will be processed by the Bureau of the Fiscal Service of the Treasury Department. The length of delays in payments will be affected by the Bureau’s capacity to process paper checks and the accuracy of “last known” addresses on file with the IRS.
How will payments be made?
Payment will be made electronically for those with direct deposit accounts, as noted above. An estimated 70 million taxpayers have such accounts. Others will receive paper checks. Recipients will get notices by mail a few weeks after their payments have been disbursed. Notices will contain information about where the payments were sent and in what form they were made. The IRS is also reported to be exploring whether payments may be made via pre-loaded debit cards.