EXPAT TAX PROFESSIONALS PROVIDES INSIGHTS INTO CARES ACT STIMULUS PAYMENTS
On Friday, March 27th, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), a massive $2 trillion bill designed to stimulate the United States economy as the coronavirus pandemic continues to inflict both physical and economic damage across the globe.
One of the highlights of the CARES Act is new Internal Revenue Code Section 6428, which provides for stimulus payments to be made directly to U.S. individuals. This means potentially thousands of dollars in your pocket within the next few weeks.
In this blog, we start with some bullet-point highlights and then use a series of detailed FAQs to analyze the CARES Act’s statutory provisions. We focus specifically on how U.S. expats can expect to benefit from the stimulus payments.
I – STIMULUS PAYMENT HIGHLIGHTS
Here are some highlights of the CARES Act stimulus payments:
- Direct payments to U.S. individuals, including those living abroad
- Payments of as much as $1,200 for individual taxpayers, and $500 per child, phased out when incomes exceed $75,000 for individuals and $150,000 for couples filing jointly
- Payments will be made based on your 2019 tax return information (or 2018 tax return information if you have not yet filed your 2019 return)
- No action is required on your part to receive a payment
- Payments are expected to be sent out within the next several weeks
- No tax or interest is due on the stimulus payments
II – ELIGIBILITY FOR THE STIMULUS PAYMENT
Who is eligible to receive a stimulus payment?
Under new Section 6428(d), an eligible recipient means any individual, except for: (i) a non-resident alien (“NRA”), (ii) an individual who can qualify as a dependent of another taxpayer, and (iii) an estate or trust.
Therefore, under the statutory definition, U.S. citizens and green card holders living abroad are eligible for the stimulus payments.
ETP Insight. Presumably, green card holders who take a treaty position to be treated as non-resident aliens on their tax returns are not eligible.
Do I need a social security number (SSN)?
Yes. Under new Section 6428(g), a payment will not be made to an individual who doesn’t have a social security number on the tax return for the year of the payment (i.e., the 2020 tax year return). This means that individuals with ITINs are not eligible.
For those who are married filing jointly, the SSN of the individual’s spouse must be included. We note that this requirement doesn’t apply if at least one spouse was a member of the U.S. Armed Forces and at least one spouse’s SSN is included on the joint return.
ETP Insight. One nuance that seems unclear from the statute (and we hope to see clarified in regulations) is how the deadline for the SSN requirement applies in light of Section 6428(f)(3), which states that no stimulus payments will be made after December 31, 2020. We hope regulations will clarify the outcome if an SSN is obtained after December 31, 2020 but before the due date of the 2020 tax year return.
Do I need to have income?
No. New Section 6428 does not have a minimum income requirement. Additionally, those whose income comes entirely from non-taxable means-tested benefit programs (for example, social security income benefits) are eligible for the stimulus payments.
Do I need to file a tax return?
Yes. As discussed further below, the U.S. government will use your 2019 tax return information in order to determine the amount of your stimulus payment and the method it will use to send you the cash. If you haven’t filed a 2019 tax return, the U.S. government will use your 2018 tax return information.
For retired individuals receiving U.S. social security income, the U.S. government will use the Form SSA-1099 (Social Security Benefit Statement) or Form RRB-1099 (Social Security Equivalent Benefit Statement), if the individual has not filed a 2018 or 2019 tax return.
ETP Insight. If you haven’t been filing tax returns, now is a very opportune time to catch up in order to receive the stimulus payment. The statute does not disqualify U.S. individuals who have been delinquent in filing until now. Keep in mind, however, that under new Section 6428(f)(3), no stimulus payments will be made after December 31, 2020. While not entirely clear, this rule can be interpreted to mean that if you don’t file either your 2018 or 2019 tax return by December 31, 2020, you will not be entitled to any payments or credits under new Section 6428. We hope regulations will clarify this point.
III – THE STIMULUS PAYMENT AMOUNT
How much is the stimulus payment?
Under new Section 6428(a), the payment is equal to the sum of: (1) $1,200 ($2,400 for eligible individuals filing a joint return), plus (2) $500 for each qualifying child of the taxpayer.
However, the amount of the payment is reduced (but not below zero) by 5% of the taxpayer’s adjusted gross income (AGI) in excess of: (1) $150,000 for a joint return, (2) $112,500 for a head of household, and (3) $75,000 for all other taxpayers.
The payment is completely “phased-out” for joint filers with no children and AGI exceeding $198,000, for a head of household with one child and AGI exceeding $146,500, and for a single filer with AGI exceeding $99,000.
Example - The Smiths are a married couple living in London with two young children. All of the family members are U.S. citizens with social security numbers. The Smiths' joint income was $100,000 in 2019. Under these facts, the Smiths would be eligible for a stimulus payment $3,400 ($2,400 for the couple and $500 for each of the two children, with no reduction).
You can use this calculator to determine your stimulus payment amount.
What is adjusted gross income (AGI)?
This is the total income that you report on your U.S. tax return that is subject to income tax (such as your employment income, interest from a bank account, etc.), less certain “adjustments” or deductions. AGI does not take into account the standard or itemized deductions.
You can find your AGI on Line 7 of your 2018 tax return, or on Line 8(b) of your 2019 tax return.
ETP Insight. For taxpayers who utilize the foreign earned income exclusion ("FEIE"), it is unclear whether the exclusion will be added back in determining your AGI amount. The current language of Section 6428 does not require this. We expect IRS guidance to clarify this point.
Which tax year will be used to determine my AGI?
For purposes of determining the amount of your stimulus payment, the U.S. government will use the information on your 2019 federal income tax return. If you have not yet filed a 2019 return, the amount of your payment will be based on your 2018 federal income tax return.
Who is a qualifying child?
A qualifying child is one who would qualify for the purposes of the child tax credit.
ETP Insight. In order for a qualifying child to be taken into account in figuring the stimulus payment amount, the child’s SSN must be included on the tax return for the year of payment (i.e. the 2020 tax year return).
IV – THE STIMULUS PAYMENT MECHANISM
How does the stimulus payment work on a technical level?
The payment mechanism is a bit counter-intuitive. At its technical core, new Section 6428 provides for a refundable tax credit on your 2020 federal income tax return. However, such refundable tax credit is reduced by an advance payment (the “stimulus payment”) to be paid to you as soon as possible during 2020.
The stimulus payment is determined by treating you as having made an income tax overpayment for 2019 equal to the stimulus payment amount. The IRS is in effect repaying you for the fictional overpayment of tax. The IRS therefore uses your 2019 tax information (or 2018, if you haven’t yet filed 2019 yet) to determine your stimulus payment amount.
How does the stimulus payment affect my 2020 tax return?
Since, as explained above, the stimulus payment is in fact an advance payment against your 2020 tax refundable credit amount, the amount you’re entitled to, after all is said and done, is based on your 2020 tax information, not your 2019 or 2018 information. This means that if your 2020 circumstances are such that you are entitled to more than your stimulus payment that is based on your 2019 circumstances, you will be able to claim the balance of the credit when filing your 2020 tax return.
ETP Insight. Importantly, if the stimulus payment ends up being greater than the credit you’re entitled to, based on your 2020 circumstances, you are not required pay back the excess.
To better understand what this means, let’s entertain three potential scenarios.
Scenario 1 – Based on your 2019 information, you receive a $1,000 stimulus payment in 2020. There are no significant changes to your circumstances in 2020, so you’re entitled to a refundable tax credit in the same amount of $1,000 on your 2020 tax return. Under this scenario, the $1,000 refundable tax credit on your 2020 tax return is reduced to $0. Your total benefit is $1,000 ($1,000 plus $0 refundable credit).
Scenario 2 – Based on your 2019 information, you receive a $1,000 stimulus payment in 2020. Your circumstances change in 2020, such that you’re entitled to a refundable tax credit in the higher amount of $1,500 on your 2020 income tax return. Under this scenario, the $1,500 refundable tax credit on your 2020 tax return is reduced to $500. Your total benefit is $1,500 ($1,000 plus $500 refundable credit).
Scenario 3 – Based on your 2019 information, you receive a $1,000 stimulus payment in 2020. Your circumstances change in 2020, such that you’re entitled to a refundable tax credit in the lower amount of $500 on your 2020 income tax return. Under this scenario, the $500 refundable tax credit on your 2020 tax return is reduced to $0. Your total benefit is $1,000 ($1,000 plus $0 refundable credit).
What happens if taxpayers filed a joint return for the 2019 tax year and received a stimulus payment, but were divorced or filed separate returns for the 2020 tax year?
Under Section 6428(e)(2), if a stimulus payment was made for a joint return, half of the rebate is treated as having been made to each spouse. So, if taxpayers filed a joint return for 2019 and received a stimulus payment, but were divorced or filed separate returns for 2020, each individual will take into account half of the advance rebate when reducing the credit allowed on his or her 2020 tax return.
Do I have to pay tax or interest on the stimulus payments?
No. The stimulus payment comes with no tax or interest strings attached.
V – PAYMENT LOGISTICS
How many payments do I receive?
New Section 6428 authorizes only one stimulus payment.
Keep in mind, however, that if your stimulus payment represents an underpayment based on your 2020 circumstances, another payment for the balance could be headed your way when you file your 2020 tax return (to the extent allowed under the refundable tax credit rules).
When should I expect to receive the payment?
U.S. Treasury Secretary Steven Mnuchin has estimated in press briefings that the stimulus payments will be received within two weeks, but analysts predict that it will take a month or more before taxpayers see the payments.
How do I receive the payment?
You should receive the payment automatically, with no action required (not even a phone call to the IRS).
Under Section 6428(f)(3)(B), if you’ve authorized the IRS to pay you a tax refund via direct deposit (since at least 2018), the IRS will use your bank account information to direct deposit your stimulus payment.
No later than 15 days after making a stimulus payment, the IRS will mail a notice to your last known address indicating how the payment was made, the amount of the payment, and a phone number for reporting any failure to receive the payment to IRS.
What if the IRS does not have my direct deposit information?
In the coming weeks, the U.S. Treasury plans to develop a web-based portal for individuals to provide their banking information to the IRS online, so that individuals can receive payments immediately as opposed to checks in the mail. A check in the mail would presumably arrive at your address that the IRS has on file.