The first stimulus payment, or economic impact payment (EIP), was part of the CARES ACT, a huge bill passed in late March. It was intended to get money into the hands of most Americans as quickly as possible. The payment was “means tested”, which means that how much you were eligible for was dependent upon your income. Since the pandemic was happening in 2020, the payment was based on your 2020 income, and the IRS was tasked with calculating and distributing the payments. But since no one could know how much their 2020 income would be in March of 2020, the IRS instead used the information from the 2019 tax return, or if the 2019 return had not been filed, the 2018 return was used.
The payment actually takes the form of a refundable tax credit. It is not taxable income. It really is just plain old free money.
However, your eligibility for the payment is based on your 2020 income, which may be a little different from your 2019 income. If your income decreased in 2020, and your payment was less than the maximum, you may be due some more EIP. If you had a child in 2020 you will be eligible for an additional $500.
The opposite is also true. NOPE!! They changed their minds on this. Overpayments of stimulus money were not required to be repaid. If your income increased in 2020 you may not be eligible for the full payment you received, and theoretically would need to repay the overage. However, the IRS seems to be going back and forth on this, and as of right now we don’t know if repayment will actually be required.
In addition, a second, smaller EIP was authorized right at the end of the year. It is unclear how many people received those payments. And of course there is talk of additional assistance when the new Congress is in session.
There will be a place on the 2020 tax return to report your EIPs and claim your EIPs if you did not receive them. We are hoping the IRS sends out an additional notification to tax payers reporting the amount of EIP received. Apparently the letters received with the payments (IRS Notice 1444) were supposed to be the official documentation, but everyone I know just threw those away. Right now the plan in our office is to request your EIP information, and if you cannot provide it we will do our best to calculate it in order to complete your return.