2021 TAX FILING

Third stimulus check: how to prove a decrease in income

The American Rescue Plan provides assistance to households who saw their incomes hurt during the pandemic. So how can you show that you lost income?

Third stimulus check: how to prove a decrease in income
CHIP SOMODEVILLA AFP

This year is like no other for the need to file a tax return, whether you do so religiously or you are a first-time filer. The $1.9 trillion covid-19 relief bill enacted in March provides struggling families with much needed aid through numerous programs.

One of the immediate effects of the American Rescue Plan Act (ARPA) are the $1,400 Economic Impact Payment (EIP) or stimulus checks, but there are mid-term and longer-term benefits in the law. ARPA enhances child tax credits for millions of families, part of which could start going out as direct payments in July through 31 December. The remainder of the child tax credit will be payable in 2022 when taxpayers file their returns, when they can also claim any money they missed in the third round of stimulus checks.

How can I prove that I lost income in 2020?

When you file your tax return this year the IRS will automatically see that your income was positively or negatively affected during 2020. However, many who are right on the borderline of a tax bracket or missed out on some or all of the stimulus money will be wondering what they can do. There are many ways to reduce your adjusted gross income (AGI) and save for the future.

If you have already filed, you may have to wait until you report your 2021 income to take advantage of 12 tips for lowering your tax bill from Nerdwallet. However, you can talk to a tax expert in the meantime to consider your options. The IRS extended the filing deadline again this year, you now have until 17 May, 2021, unless you file for an extension.

Benefits of lowering your AGI

Besides possibly moving into a lower tax bracket and reducing your tax burden, it may qualify you for some tax provisions in the ARPA. This includes the $1,400 stimulus payments per person and the enhanced child tax credit. You can also set aside money for retirement or for possible future medical expenses.

Eligibility requirements for $1,400 stimulus check

As with the previous two rounds of direct stimulus payments, in the third round individuals who have an AGI of $75,000, couples making $150,000, or heads of household earning $112,500, plus their children or adult dependents, qualify for the full $1,400 per person. Mixed-status households, where members have different citizenship but at least one person has a Social Security Number, are also eligible for a payment.

However, above those income thresholds, the direct stimulus payment amounts will phase out much faster than in the previous two rounds. An individual with an AGI of $80,000, a couple making $160,000, or a head of household earning $120,000 won’t see any stimulus money.

Enhanced child tax credits

The new system provides a refundable tax credit of $3,000 for children aged from 6-17 and $3,600 for children who are under the age of six for the 2021 fiscal year. Families could receive a payment of $300 per child under 6 and/or $250 per child under 18 per month. The provision calls for the payments to go out monthly starting 1 July, through December although the IRS Commissioner Charles Rettig told Congress that the agency might not have the resources to meet that date or even send the payments monthly. The bill contemplated that sending the payments monthly might be too tall an order for the IRS to meet.

Under the new legislation, individuals will qualify for the enhanced Child Tax Credit if their annual earnings are below $75,000; or a joint income of up to $150,000 for married couples. If your earnings are above those limits, you will receive a reduced credit which gradually phases out and ends for individuals earning $95,000 and married couples earning $170,000 filing jointly. Above those limits the rules for the previous Child Tax Credit will apply.

Required documentation to file your tax return

These are the documents you will be required to complete if you'll be using the above tools to fill out your 2020 tax return:

Personal information

  • A copy of last year's tax return in order to access your Adjusted Gross Income (AGI)
  • Valid Social Security numbers for yourself, your spouse, and any dependent, if applicable

Proving your AGI: income and receipts

  • Social Security benefits documentation
  • Unemployment Compensation documentation
  • All receipts pertaining to your small business, if applicable
  • Income receipts from rental, real estate, royalties, partnerships, S corporation, trusts

Other income

  • W-2s, showing your annual wages from all of your employers
  • Form 1099-INT, showing interest paid to you throughout the year
  • Form 1099-G, showing any refund, credit or offset of state and local taxes
  • Forms 1099-DIV and 1099-R, showing dividends and distributions from retirement and other plans paid to you during the year

Affordable Care Act (ACA) filers

  • Form 1095-A, Health Insurance Marketplace Statement. For more information see Affordable Care Act (ACA) Tax Provisions.
  • Form 8962, Premium Tax Credit

File electronically

  • Verify your identity by using your 2019 AGI. If you created a 2019 personal identification number, that will work too. The personal identification number required that you create a five-digit PIN that could be any five numbers (except all zeros) that you choose which serves as your electronic signature.
  • Can't find your AGI or PIN? If you do not have a copy of your 2019 tax return, you may use the IRS Get Transcript self-help tools to get a tax return transcript showing your AGI. You have two options:
  • Online: Select the Tax Return Transcript and use only the “Adjusted Gross Income” line entry. Secure Access: How to Register for Certain Online Self-Help Tools provides you with the information you need to make the request.
  • By Mail: Please allow 5 to 10 days for delivery. Use only the “Adjusted Gross Income” line entry.

Valid email address required for contact

To get a notification from the Free File software company that your return was accepted by IRS, you need a valid email address, ensure to have this ready when starting.

Recovery Rebate Credit

If you didn't receive your stimulus check - or Economic Impact Payment - or only got part of the full amount, you may be eligible ti claim the rest through a Recovery Rebate Credit

How long will it take to process my tax refund?

You will usually receive your refund within three weeks of the date when the IRS receives your return, even faster if you choose to have it directly deposited into your checking or savings account.

Though there’s a notice on the IRS advice website that states that they’re having some staffing issues, so processing paper tax returns could take several weeks longer. Taxpayers and tax professionals are encouraged to file electronically.

Third stimulus check: latest updates

You can get the latest information on the third stimulus check, and updates on the possibility of a fourth direct payment, by following our dedicated live blog.

You'll also find news on other provisions in Biden’s economic-aid package, such as an enhanced child tax credit that offers qualifying families up to $3,000 per child aged six to 17, and $3,600 per child below six.