New parents, college grads get extra refund cash when they claim recovery rebate credit

College grads in the Class of 2020 could face a happy surprise when they file their 2021 federal income tax returns. They could be looking at a way to claim up to $1,400 in stimulus money now.

The same's true if you had a baby in 2021. Or maybe even saw a much smaller bonus or far less overtime in 2021 than the previous year.

We've heard many warnings about why you don't want to try to double dip and should take extra care before throwing a number on Line 30 of the 1040 to claim the 2021 recovery rebate credit.

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Taxpayers face major delays for their federal income tax refunds when they incorrectly claim the recovery rebate credit on a 2021 return after they already received the full amount of the third economic impact payment that was issued last year.

The Internal Revenue Service is seeing mistakes in claiming the recovery rebate credit and warns taxpayers that it could take several weeks to resolve some issues.

Tax rules tough to understand

But what about people who actually qualify for the recovery rebate credit — and don't realize it?

The IRS isn't sending out more stimulus money now automatically if you missed out last year. If you qualify, the only way to get that money is to claim the recovery rebate credit by filing a 2021 return.

"We have come across clients that were unaware that they could claim the credit," said Matt Hetherwick, director of individual tax programs for the nonprofit Accounting Aid Society in Detroit, which offers free tax preparation for families and individuals with incomes up to $58,000.

"The past few years have been challenging because of the disruptions and changes to tax law," he said.

Experts such as Hetherwick said it's not surprising that people don't understand all the tax rules, which are tough to understand even when our lives are more stable and the tax rules are more predictable.

Even so, we're talking about big money on the table if you didn't receive the stimulus money you were due last year.

Here's a look at who might want to give the recovery rebate a second look:

Did you have a baby in 2021?

Busy moms typically don't have an extra minute to delve into all the latest tax rules. Parents and guardians who received some stimulus money last year also might not realize that the baby was left out of the picture.

The IRS put a notice on its website in late January that confirmed that parents of a child born in 2021 did not receive a third stimulus payment for a newborn.

Now you may be eligible to receive up to $1,400 for the child born last year or welcomed through adoption or foster care by claiming the recovery rebate credit. The recovery rebate credit also can apply if an adult became a qualifying relative in 2021 and was not a qualifying relative in 2019 or 2020.

Parents also should pay attention to the rules for claiming the child tax credit, which could further fatten a refund and be worth up to $3,600 per child.

Remember, all households did not get the same payment for stimulus money in 2021. A family of four might have qualified for up to $5,600. A single person could qualify for up to $1,400. Not getting stimulus money for an extra dependent matters.

Can you be claimed as a dependent?

College grads and even high school grads who don't go on to college and live on their own might be able to claim the recovery rebate credit if they qualify based on income and other requirements.

Someone who was a dependent in 2020 but was no longer a dependent in 2021, such as a 2020 graduate, might qualify for the recovery rebate credit and not realize it, Hetherwick said.

Yet this tax strategy for claiming the credit doesn't work for everyone.

"If they were full-time students for more than four months and one day in 2021, then they are technically still a dependent in tax year 2021," Hetherwick said.

If you can be claimed as a dependent on another person's return, you cannot take the recovery rebate credit.

Various rules apply for parents who want to claim children, including that a child can be claimed as a dependent under age 19 or if the child is a full-time student and is under age 24. No age limit applies if the child is permanently and totally disabled.

Henry Grzes, lead manager for Tax Practice & Ethics with the American Institute of CPAs, said someone who was claimed on their parents' return in 2020 but is no longer a dependent should look into whether they would qualify for the recovery rebate credit when they file their own return this tax season.

"They clearly might not pick that up," he said.

The parent who claimed the dependent on a 2020 return might have received the third stimulus payment in advance of filing their 2021 return this year, he said, and does not have to pay that back even if the grown child who is no longer a dependent qualifies now when filing a 2021 return.

The IRS notes online that no provision in the law requires "individuals who qualified for, and received, a third-round economic impact payment (including a plus-up payment) based on their 2020 or 2019 information, to pay back all or part of the payment if, based on the information reported on their 2021 tax returns, they would have qualified for a lesser amount."

Are you divorced?

Divorced couples who have children may want to study the recovery rebate credit and see how it might apply.

Take a divorced couple who alternate claiming a dependent each year.

If one ex-spouse received the economic impact payment last year based on the 2020 tax return, the other spouse who will claim the child as a dependent in 2021 can still claim the recovery rebate credit, according to Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting in Riverwoods, Illinois.

Someone who was divorced in 2021, Grzes said, also might not have qualified for the third stimulus payment based on the 2020 income as a married couple. But as a single tax filer or someone filing as head of household, the person might qualify based on a lower income now.

How much money did you make in 2021?

Trying to claim the recovery rebate credit is a no-go if you're a higher-income filer. But many young families and grads who are just starting out are living on modest incomes.

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You can't take the recovery rebate credit on your 2021 return, for example, if you're single or married filing separately and make more than $80,000 in adjusted gross income, as found on Line 11 of your 1040 return for 2021.

If you're married filing jointly or a qualifying widower, the cutoff is $160,000. And for head of household, the cutoff is $120,000.

A partial credit is available if you hit the phase-out range and make more than $75,000 for singles, $150,000 for married couples filing jointly and $112,500 for head of household.

Did you make less money in 2021?

Perhaps you didn't receive stimulus money in advance last year because you had a higher income in 2020. But maybe you saw a drop in income in 2021.

Maybe you worked part time in 2021, instead of full time. Maybe you retired.

Many people made less money in 2021, including some who were laid off for a long period of time last year, said Mark Steber, chief tax officer at Jackson Hewitt Tax Service.

Someone who saw a much smaller bonus in 2021 than they did the previous year – or suddenly no bonus at all – also could find themselves in a spot where they qualify for the recovery rebate credit, Steber said.

If your adjusted gross income was lower last year than it was in 2020 – when it was too high for you to qualify for the full stimulus payment that was being sent out in 2021 – you want to review the recovery rebate credit now to see if you can claim it.

Claiming the credit could help many people see a larger income tax refund – or owe less money in taxes now – if they qualify.

Some mistakes and oversights took place

Some people should have been sent a stimulus payment last year but weren't due to various glitches and reasons, according to a report issued in late March by the Treasury Inspector General for Tax Administration.

Some 133,578 individuals who were unemployed in 2020, for example, didn't get advance payments when they qualified for the money, according to the report.

A one-time tax break was enacted on March 11, 2021, that allowed taxpayers who had a modified adjusted gross income of less than $150,000 to exclude up to $10,200 of jobless income from their taxable income in 2020 only.

But some people filed their 2020 taxes before the new tax break went into place. The IRS was making automatic adjustments to the 2020 tax returns.

The IRS maintained that once a taxpayer had been evaluated for an advance payment based on a 2019 or 2020 return, the stimulus payments couldn't be reconsidered in this case.

The IRS said these taxpayers will need to claim the recovery rebate on their 2021 returns.

"These individuals either did not receive any or only received a phase-out payment due to their adjusted gross income before the unemployment benefit exclusion," according to the TIGTA report.

This group is qualified to receive $195 million but will need to claim the recovery rebate credit to do so. Another 5,000 or so taxpayers didn't get the advance payments due to other issues and need to claim the recovery rebate credit as well.

The latest TIGTA report indicated that 644,705 people did not receive their third stimulus payments as of Sept. 16, 2021, and did not receive $1.6 billion in advance payments

Over time, some situations were resolved later in 2021. But others were not.

What stimulus is at stake?

The 2021 return addresses shortfalls with the third stimulus payment – which was paid out from March through December last year – was based on 2019 or 2020 tax return information. "Plus-up" payments were made last year to individuals whose advance payment was initially based on a 2019 return and who later filed their 2020 return that indicated that they qualified for more money.

Look for paperwork and confirmation to see what you were paid before assuming you didn't get all you deserve.

Look for Notice 1444-C, which the IRS mailed out last year to show you how much was issued for the third stimulus payment.

On top of that, the IRS began issuing what it calls Letter 6475 late in January to help tax filers figure out how much they received for the third stimulus. Married couples filing a joint return received two letters.

You can skip reviewing the recovery rebate credit, for example, if you're single and already received $1,400 plus another $1,400 for each dependent you had last year.

And you don't qualify for the recovery rebate credit if you're filing a joint return and you and your spouse received $2,800 and $1,400 for each dependent you had in 2021.

The IRS issued more than 175 million stimulus payments involving the third program, which added up to more than $400 billion to individuals and families nationwide in 2021.

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What if I already filed a return but didn't claim the recovery rebate?

If you qualified for a recovery rebate credit but did not claim it on a 2021 return, the IRS says you will need to file an amended 2021 return.

If you filed the 2021 return electronically, you may be able to e-file Form 1040-X.

But if you filed a paper return, you'd need to submit a paper version of Form 1040-X.

An important note: The IRS says do not file an amended return if you made a mistake and claimed the recovery rebate credit when you already received that money in 2021.

The IRS will correct the amount of the 2021 recovery rebate credit that's claimed if the records don't match. And you'd receive a notice identifying the changes made.

And yes, that will delay processing the return. "If the taxpayer agrees with the changes made by the IRS, no response or action is required to indicate they agree with the changes," the IRS said.

But if you disagree, you're going to need to call the toll-free number listed on the top corner of the notice of the problem.

Contact Susan Tompor via [email protected]. Follow her on Twitter @tompor.

This article originally appeared on Detroit Free Press: Bigger refunds: Who should claim stimulus cash and recovery rebates

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