Stimulus credit -- newly independent taxpayers

[ajp]

I was doing the return of a client who will be filing independently for the first time this year.  She did not receive stimulus payments because she was a dependent for 2019.  When doing her tax return, the program is giving her the credit.  This is awesome, if it is supposed to happen this way, but can anyone clarify.  I don't want it to be a mistake, and have the IRS ask for it back later.  

I do read updates regularly.  I know the credit is for those who didn't get one or both stimulus payments, but should have.  I just wasn't thinking she "should" have gotten a stimulus since she was a dependent in 2019.

Thank you!

[IRonMaN · Accepted solution]

If she really no longer is a dependent, she does indeed get the credit.  If however someone else could be claiming her as a dependent, she wouldn’t get the credit.

[dd4vols]

The 'stimulus payments' are  2020 Payments (even the one received in 2021, because it was authorized in late Dec 2020).  They just used 2019 numbers because most of the 2020 returns were not received/accepted/approved when they started the stimulus process.  

The stimulus payments had NOTHING to do with 2019 filing status...they just had to have somewhere to start getting info. Likewise, the recovery rebate should have NOTHING to do with 2019 filing status.

[ajp]

In this case, she really is independent.  She had finished college, moved out, paid her own rent, etc.  I just didn't want her to get stuck repaying a credit that I applied incorrectly.  Thank you!

[qbteachmt]

"I just wasn't thinking she "should" have gotten a stimulus since she was a dependent in 2019."

"In this case, she really is independent."

You might want to Bookmark these and perhaps it would help to review what is really happening:

The funds were paid out as Advanced payment against a projection. The projection used 2018 or 2019 tax returns. But 2020 is the Actuals. You use the 2020 return to reconcile what a person is entitled to, against what they got.

If the person is not a dependent in 2020, then they would be entitled to the payment/credit. That doesn't mean "not being claimed." It means "no longer qualifies as a dependent."

You might want to bookmark these links and read the IRS guidance.

Interactive wizards portal for determining dependency:

https://www.irs.gov/help/ita

And:

https://www.irs.gov/newsroom/economic-impact-payment-information-center-topic-a-eip-eligibility

https://www.irs.gov/coronavirus/second-eip-faqs#Eligibility

One for each EIP.

[ajp]

Thank you!

Links are helpful.  I do think that people will "choose not to claim" people once this is figured out, and that does make me concerned about an increase in audits.  Thankfully, this is a situation that isn't gray.  The person was not a dependent this year.  

Some of the wording regarding dependency is bothersome though.  Since she is under 24 yrs old (23), it asks if her "earned" income was enough to cover more than half her expenses.  This bothers me a bit, because I think you can be independent while using student loans, earned income, and unearned income. Her parents did not fund her life.  She did have all three things that I mentioned.  

[qbteachmt]

"I do think that people will "choose not to claim" people once this is figured out"

That's fine. That's Not the issue. The issue is if this young person must checkmark that they could be claimed by someone else. Not if they Were claimed. That's why you need to know the tests which evaluate that condition.

[ajp]

Right.  Like I said, in this case no one else can claim her. 

However, I am just making sure I understand the stimulus (and care credit) inside and out.  

I do understand what qualifies for dependency.  

[ajp]

I keep thinking about this.  When we fill our the support worksheet, etc. my client is meant to claim herself.  No one else can claim her.  So, the boxes on the information sheet are fine.  

However, and now I can't find it, I was asked about whether at least half of her support came from her "earned income."  I don't see how this should matter since she DID provide more than half of her support.  This year, she had a collection of resources including earned income, unemployment, unearned income through the sale of some mutual funds, and a small amount of student loans.  All these resources are her own.  I wish I could find where this question was asked.  I think it was in regard to the education credits.  

[qbteachmt]

"I don't see how this should matter since she DID provide more than half of her support"

Well, it matters, because the IRS sets what matters. And, each credit, refund, qualification, is a different set of rules. Just like AGI vs MAGI is different.

Unemployment is Unearned income, but taxable. It's treated similar to investment income.

As you know, support and dependency and even custody, are each treated differently.

"All these resources are her own. I wish I could find where this question was asked. I think it was in regard to the education credits."

Student Loans are not income. And you might be thinking about EITC?

[rbynaker]

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@ajp wrote:

However, and now I can't find it, I was asked about whether at least half of her support came from her "earned income."  

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This will come in to play in determining both kiddie tax and the refundable portion of AOTC.