Recovery Rebate Credit: EIP2 Payment Received in 2021, Report on TY2020 or TY2021?

[MagicLou]

Hello Tax Experts,

  My taxpayer received the first stimulus payment in May, 2020, in the correct amount for she and her husband and their three dependent children ($3900).  EIP2, however, did not arrive until February 2021 ($3000).  Since she is a cash-basis taxpayer, filing a joint Individual return, can she ignore entering her EIP2 payment amount on Line 20 of the Recovery Rebate Worksheet, but then report it on her TY2021 tax return?  I'm sure the IRS has well-thought this out and has planned ahead for a second- and third-year stimulus "true-up" at the end of 2021.  As a cash-basis taxpayer, every other payment received on her return is reported in the year it is received (including state tax refunds).   If she had already filed her return in January, before receiving her EIP2, would she then be required to file an amended return?  Why can't the IRS come out with an authoritative ruling on this subject?

Thank you in advance for answering my question.

Magic Lou

[MinhT1]

You have to report both stimulus payments on your 2020 tax return, even if your receive the second payment in 2021.

In fact, both these payments are advanced payments of the 2020 Recovery Rebate Credit.

Please read this IRS document on the Recovery Rebate credit.

[MagicLou]

Thanks for your reply.  Can you point me to the page and paragraph in the Q & A IRS document you referenced that deals with payments received in 2021, and that clearly states that they should be used in calculating the 2020 recovery rebate credit?  Thank you.

[LenaH · Accepted solution]

Per the 1040 instructions for Line 30, if you didn’t receive the full amount of the recovery rebate credit as economic impact payments, you may be able to claim the recovery rebate credit on your 2020 Form 1040 or 1040-SR.

The first round of economic impact payments (EIP 1) was sent out beginning in April 2020, and the second round of economic impact payments (EIP 2) was sent out beginning in late December 2020. You may have received one or both of these payments. 

You don’t qualify for the recovery rebate credit if, for EIP 1:

• You received $1,200 plus $500 for each qualifying child you had in 2020, or

• You’re filing a joint return for 2020 and together you and your spouse received $2,400 plus $500 for each qualifying child you had in 2020.

And for EIP 2:

• You received $600 plus $600 for each qualifying child you had in 2020, or

• You’re filing a joint return for 2020 and together you and your spouse received $1,200 plus $600 for each qualifying child you had in 2020.

In addition, the Recovery Rebate Worksheet in the 1040 instructions shows to include EIP2 starting on Line 8.

Since the IRS guidance is to include the EIP2 amount received in the calculation, It does not matter whether your client is a cash-basis taxpayer. Your client has not yet filed their return (almost two months after they received their payment) and therefore, the information should not be purposefully omitted on their return.  

Even if it the EIP2 was not included, then the IRS will automatically adjust your client's return and deduct the Recovery Rebate Credit claimed since it does not match what is in their database. I have taken the below snapshot from 2020 Recovery Rebate Credit — Topic G: Correcting issues after the 2020 tax return is filed, 

The only reconciliations that will be made on 2021 tax returns will be for EIP3. Only 2020 returns are reconciling EIP1 and EIP2. 

@MagicLou

[Planman315]

Your answer makes sense. The Service knows if EIP 2 was received and will adjust accordingly.  All these questions would be eliminated if they changed Worksheet Line 19 to read: "Enter the amount, if any, of EIP 2 that was issued to you in 2020 or 2021."