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Quick Review of Federal Stimulus Payments

December 1, 2021

In response to the economic disruption caused by the COVID pandemic, Congress authorized a series of stimulus payments to eligible taxpayers. You probably have heard several names for these payments - the "stimulus," the "Economic Impact Payment" or "EIP," the "Recovery Rebate Credit." These names are all referring to the same general payments.

Congress authorized three rounds of payments to be sent directly to taxpayers. Each of these is known as an Economic Impact Payment, or EIP. Further, they were labeled with a number to identify the "round" of payment: EIP-1 for the first round, then EIP-2, and EIP-3. To calculate the amount of the payments, IRS used the most recently filed Form 1040 tax return as a "best guess" for a taxpayer's income. Creating further confusion, IRS issued these payments in different ways: as a paper check through the mail from the Treasury Department, as a direct deposit into a taxpayer's bank account, or as a pre-paid debit card through the mail. The method was not consistent - for example, we saw clients who received EIP-1 through direct deposit to a bank account but who then received EIP-2 as a debit card. Taxpayers with incomes above certain levels were not eligible for one or more of the payments.

In many cases, taxpayers did not receive an advance EIP but actually were eligible to receive stimulus money. So Congress implemented the Recovery Rebate Credit, which is a tax credit on the Form 1040. Essentially, if you were eligible for stimulus money but didn't receive it through EIP, you receive the stimulus money through the Recovery Rebate Credit when you file your taxes. So the EIP is stimulus money "in advance" and the Recovery Rebate Credit is the same stimulus money "not yet received in advance."

The EIP-1 payments were distributed from April 2020 through late fall of 2020. EIP-2 payments were authorized the last week of 2020 and started to be sent out in January of 2021. EIP-3 began in roughly March of 2021 - this is another source of confusion, because for many people, EIP-2 and EIP-3 were arriving at nearly the same time.

The advance EIP payments must be reported on taxpayers' Form 1040 in order to determine if the taxpayer is eligible for any additional money through the Recovery Rebate Credit. Despite when a taxpayer actually received an EIP, Congress specifically tied the payments to exact years: EIP-1 and EIP-2 are reported for tax year 2020, and EIP-3 is reported for tax year 2021.

So when we file your 2021 taxes, we will need to know exactly how much money you received for EIP-3, even if that amount is $0. (In the same way we needed your EIP-1 and EIP-2 amounts when preparing your 2020 taxes.)

Many clients have asked, are these payments considered taxable income? Officially, no. They are not added into your income for your Federal taxes. However, indirectly, they have increased state income taxes for residents of many states, including Oregon. As a tax credit, the payments reduce the amount of the Federal tax liability subtraction on your Oregon Form 40. So, technically, it's not considered income, but it creates the effect of making your Oregon adjusted gross income higher, which causes your tax to Oregon to be higher.

This past year, we have seen significant problems for many taxpayers related to the stimulus payments. The most common problem is that IRS records of payments made do not match the taxpayer's records of payments received. This problem has many causes. A common situation is that IRS recorded payment of an EIP when it mailed a debit card, but the debit card never arrived in the taxpayer's mailbox (it was lost or stolen while in transit). Because IRS is severely backlogged due to the pandemic shutdowns, getting this problem resolved has taken several months for most taxpayers who have run into it.

I am hoping that handling issues with EIP-3 will be less chaotic in 2022, since IRS now has the experience of EIP-1 and EIP-2 under its belt. Please let our office know if you receive correspondence from IRS, if your Recovery Rebate Credit is different (larger or smaller) than what you are expecting, or if you encounter anything else that is "weird" related to the stimulus payment. Our office doesn't receive a copy of the correspondence, so we don't know there's a problem unless you tell us. We will review the issue and advise you on the next steps that should be taken (whether by you or by our office) to get the matter solved.

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