What Is an Economic Impact Payment (EIP)?
Demystify Economic Impact Payments. Explore their design, who was eligible, how they were distributed, and how to address discrepancies.
Economic Impact Payments (EIPs) were government initiatives providing financial relief to individuals and families during economic challenges. These payments aimed to inject funds directly into the economy and support households.
Understanding Economic Impact Payments
Economic Impact Payments served as direct financial aid disbursed by the U.S. government, structured as advance payments of a refundable tax credit called the Recovery Rebate Credit. EIPs were not considered taxable income.
Multiple legislative acts authorized these payments. The Coronavirus Aid, Relief, and Economic Security (CARES) Act (March 2020) authorized the first round. The Consolidated Appropriations Act, 2021 (December 2020) provided a second. The American Rescue Plan Act of 2021 (March 2021) authorized a third.
Eligibility for Payments
Eligibility for Economic Impact Payments varied by round, based on Adjusted Gross Income (AGI), filing status, and dependent qualifications.
The first EIP (CARES Act) provided $1,200 for eligible individuals, $2,400 for married couples filing jointly, and $500 per qualifying child. Recipients needed a Social Security number and could not be claimed as a dependent. Payments phased out for single filers with AGI over $75,000, heads of household over $112,500, and married couples over $150,000.
The second EIP provided $600 for individuals, $1,200 for married couples, and $600 per qualifying child. Phase-out thresholds were consistent with the first round.
The third EIP increased payments to $1,400 for individuals, $2,800 for married couples, and $1,400 per qualifying dependent. While phase-out began at the same AGI thresholds ($75,000 single, $112,500 head of household, $150,000 married), payments phased out completely at lower overall income levels.
Eligibility for all rounds relied on the most recently filed tax return information available to the Internal Revenue Service (IRS), typically from the 2019 or 2020 tax year.
Receiving Your Payment
The IRS distributed Economic Impact Payments through several methods. Direct deposit was the primary method for individuals with banking information on file, often from a recent tax refund, ensuring quick and secure delivery.
Payments were typically mailed as paper checks to those without direct deposit. For later rounds, the IRS also sent EIPs as prepaid debit cards (EIP Cards), which could be activated and used like standard debit cards. The IRS also provided an online “Get My Payment” tool to track payment status and delivery method.
Addressing Payment Discrepancies
If an individual did not receive an EIP or the amount received was incorrect, the Recovery Rebate Credit was the primary mechanism to resolve these discrepancies. This credit was claimed on federal income tax returns (Form 1040 or 1040-SR). The Recovery Rebate Credit allowed taxpayers to reconcile missing EIP amounts or claim additional funds based on their tax year circumstances.
To claim the credit, taxpayers needed to know the total EIPs already received. The IRS provided Notice 1444 (first EIP) and Letter 6475 (third EIP) stating the total payments issued. If notices were unavailable, taxpayers could use their IRS online account or bank statements to determine amounts received.
Taxpayers calculated the correct EIP amount based on their AGI, filing status, and dependents for the relevant tax year. If the calculated amount exceeded EIPs received, the difference could be claimed as the Recovery Rebate Credit. This required completing a specific worksheet or line on Form 1040 or 1040-SR. For those who had already filed, an amended return (Form 1040-X) typically needed to be filed to claim the credit.
The Recovery Rebate Credit ensured eligible individuals received their full entitlement.
References
https://www.irs.gov/newsroom/economic-impact-payment-information-center-topic-a-receiving-the-first-and-second-economic-impact-payment
https://www.irs.gov/newsroom/third-economic-impact-payment-questions-and-answers-topic-a-receiving-the-third-payment
https://www.irs.gov/newsroom/economic-impact-payment-information-center-topic-c-calculating-the-economic-impact-payment
https://www.irs.gov/coronavirus/get-my-payment
https://www.irs.gov/newsroom/recovery-rebate-credit