Taxes and the Third Stimulus Check: Why You Should File Soon if Your Income Dropped Last Year
If you haven't even begun to consider doing your taxes yet, you're not alone. Procrastinating is basically an American pastime, and with the way time moves during the pandemic, April 15 may as well be a century away.
But this year, there's actually a pretty compelling reason for you to file early: Depending on your financial situation, it could lead to a larger stimulus check.
The IRS will start processing 2020 federal income tax returns on Friday, right in the middle of a congressional debate over whether to approve a third round of Economic Impact Payments to help people through the coronavirus crisis. These two topics are linked because the government relies on tax data to determine how much money to give each American — and given the craziness of the past year, there's a good chance your data has changed.
Here's what you need to know.
Previous stimulus checks were based on 2018 and 2019 taxes
After the passage of the CARES Act last March, the government automatically calculated most people's stimulus check amounts based on the adjusted gross income reported on their 2018 and 2019 tax returns. (Remember that each year's taxes are filed the following spring, so 2019 taxes were the ones you filed in 2020.)
If you'd already filed your 2019 taxes, the IRS said it would "use this information to calculate the payment amount" for the first stimulus check. If you hadn't, the IRS defaulted to the info it had from your 2018 taxes.
Fast forward to December, when Congress approved the second round of stimulus checks. These were based on filers' 2019 tax returns as well as information submitted by non-filers in 2020 using an online tool.
That brings us up to the present. According to a House Ways and Means Committee draft shared Monday, the third stimulus check could be based on people's 2019 or 2020 tax filings. This proposal follows a path similar to the CARES Act. The IRS will use your 2019 data for the third stimulus check unless if, at the point when the payments are calculated, you've already filed your 2020 tax return.
Your 2020 taxes could affect your third stimulus check
The 2019/2020 distinction matters because the third stimulus check could have income thresholds. For the first two payments, only single filers who make $75,000 or less and married couples that earn $150,000 or less got the full amount. The payments decreased over those limits and eventually went to 0.
This could be a widespread issue because so many people's incomes changed in 2020. Some 22 million jobs were lost in March and April alone. By August, 58 million unemployment claims had been filed. Those who didn't lose their jobs also suffered: A September survey from the Pew Research Center found that one in five adults saw reduced hours or a pay cut. Money itself recently found that 37% of Americans say their current financial situation is worse than it was this time last year.
So if your income decreased in 2020, you may want to let the IRS know. That way, if a third stimulus check passes, the government has the most up-to-date numbers for its calculations. And ideally, those calculations will fall in your favor.
Sen. Ron Wyden, D-Ore. and chairman of the Senate Finance Committee, summed it up in a recent tweet: "By filing your taxes early, you'll ensure your next relief payment will be based off of your most recent income. If you lost wages in 2020 as a result of this pandemic, file your taxes ASAP to ensure you get the help you need."
Here's a super-simple example.
Say you made $200,000 in 2019. Then the pandemic hit, you had to change jobs, and you earned just $20,000 in 2020. If a third stimulus check passes with a $75,000 income limit, and the IRS only has your 2019 salary on file, it may think you're not eligible for the full payment. But if the IRS can pull from your 2020 return and see that your income dropped, it could issue you a bigger check.
This advice extends beyond just income. If you experienced a life change in the last year or so — like if you had a baby or went from dependent to independent — you may be eligible for more stimulus money. And aside from the coronavirus, there are still other solid reasons to file your taxes early. It's a smart move in general.
"Everyone should consider filing income taxes early, at least as early as they can, because there is no reason for any taxpayer to wait — unless they are waiting on paperwork," says Mark Steber, chief tax officer at Jackson Hewitt. "Filing sooner rather than later not only protects your tax information from scammers, but it also means you’ll get your refund sooner or have more time to pay."
Filing your return soon can help hedge your bets
Of course, this situation could change because lawmakers are still figuring out how targeted the third stimulus check should be. Different income limits are a real possibility. The legislation also has a long way to go.
It's worth noting that, under the current proposal, people would get eventually get what they're owed. The Washington Post pointed out a section in the House draft that indicates if your check is disbursed based on your 2019 income but your 2020 or even 2021 taxes qualify you for more aid, you'll receive it later on. (This is similar to how the Recovery Rebate Credit is addressing errors with the first and second stimulus checks by increasing people's 2020 tax refunds.)
But this process could take a while, so it's probably still best to get your correct income level on file now.
"Currently, there is nothing in place for a third stimulus check or other legislation for those who collected unemployment benefits or proposed changes to tax credits," Steber says. "Taxpayers shouldn’t wait for the government to possibly pass another tax bill, which in the long run may delay from filing early now."
As a reminder, the fastest way to get your tax refund and any future stimulus payments is to file online and make sure the IRS has your direct deposit information.
More from Money:
Answers to All Your 2021 Tax Questions, From Stimulus Checks to New Deductions
68% of Americans Say They Need Another Stimulus Check
Third Stimulus Check: What We Know About the Amount, Eligibility and Timing