Filing taxes early could benefit some under Democratic proposal

Congress this week will tackle a Democratic proposal that seeks, when possible, to base the next round of coronavirus relief checks on the reduced income many Americans earned during the pandemic.

People whose incomes were reduced last year would have motivation to file their tax returns early this year, so that they could quickly get stimulus payment based on their 2020 incomes. Additionally, the bill calls for the IRS to issue supplemental payments this year to people who don’t file their 2020 tax returns early but saw their income decline last year.

The proposal, released late Monday, calls for payments of $1,400 per person.

Individuals with income of up to $75,000 and married couples with income of up to $150,000 are eligible for the full payment amounts. The amounts then are gradually reduced above those thresholds, and zero out for single filers with income above $100,000 and married couples with income above $200,000.

This year’s tax-filing season, when people will be filing their 2020 tax returns, starts on Friday. Many people will be filing tax returns that show they had less income in 2020 than in 2019 because of the pandemic. Some of those people could qualify for larger stimulus payments if they receive their payments based on their 2020 return than if their payments are based on their 2019 returns.

It’s unclear when a new round of direct payments will be enacted, and how many people will have filed their 2020 tax returns by the time the IRS issues any new checks. House Democrats’ bill instructs the IRS to take steps to get payments to people based on their 2020 returns when possible.

Under the bill, the IRS would initially make payments to people based either on their 2019 return or their 2020 return if that one has already been filed. The IRS would also be able to use information available to them to make payments to people who did not file tax returns for either year.

The bill then instructs the IRS to make additional payments to people who filed their 2020 tax returns after initial payments were disbursed and qualify for larger payments based on those returns. The additional payments would be for amounts equal to the difference between what the taxpayers are entitled to based on their 2020 returns and what they have already been paid.

Ultimately, the payment amounts would be based on 2021 income. People who do not receive the full amount that they would be eligible for based on their 2021 income would be able to claim a credit on their 2021 tax returns, which they will file next year.

People who receive payments this year that exceed the amount they would be entitled to based on their 2021 return will not have to pay money back to the IRS.

The House Ways and Means Committee is scheduled to spend Wednesday, Thursday and Friday considering its portions of the relief package, which includes the section on the new round of direct payments.