What Is the Recovery Rebate Credit for 2021?
Navigate the 2021 Recovery Rebate Credit. Discover how to reconcile past economic relief payments and secure the tax credit you're due.
The 2021 Recovery Rebate Credit allowed eligible individuals to claim any remaining portion of the third Economic Impact Payment (EIP3) that they did not receive. This refundable tax credit was designed to reconcile the advance payments made by the Internal Revenue Service (IRS) with a taxpayer’s actual eligibility based on their 2021 tax situation. Individuals who did not receive the full amount of EIP3 could claim the difference when filing their 2021 federal income tax return.
Understanding the Recovery Rebate Credit
The Recovery Rebate Credit for 2021 directly related to the third round of Economic Impact Payments. The credit’s purpose was to ensure that individuals received the full amount they were entitled to, considering their income, filing status, and number of qualifying dependents for the 2021 tax year.
This credit operates as a refundable tax credit, meaning it can result in a tax refund even if a taxpayer owes no income tax. If the credit amount exceeds the tax liability, the difference is paid out to the taxpayer. The maximum amount for the third round of payments was $1,400 per eligible individual and an additional $1,400 for each qualifying dependent claimed on the 2021 tax return.
Determining Your Eligibility
An individual must have been a U.S. citizen or U.S. resident alien in 2021. Furthermore, the individual could not be claimed as a dependent on someone else’s 2021 tax return. A valid Social Security number (SSN) was generally required.
For married couples filing jointly, if only one spouse had a valid SSN, they could claim up to $1,400 for the spouse with the SSN and for each qualifying dependent. However, if either spouse was an active member of the U.S. armed forces at any time during 2021, only one needed a valid SSN for both to be considered.
Eligibility was also subject to Adjusted Gross Income (AGI) phase-out thresholds. For single filers, the credit began to phase out at an AGI of $75,000 and was completely phased out at $80,000. For those filing as Head of Household, the phase-out began at $112,500 and was fully eliminated at $120,000. Married couples filing jointly saw their credit reduced starting at an AGI of $150,000, becoming zero at $160,000. Changes in income from 2019 or 2020 to 2021, the addition of a new dependent (such as a child born in 2021), or no longer being a dependent in 2021 could all impact eligibility and potentially increase the credit amount.
Calculating Your Credit
The calculation of the 2021 Recovery Rebate Credit involved determining the maximum potential credit based on 2021 tax information and then subtracting any third Economic Impact Payments (EIP3) already received. The maximum potential credit was $1,400 for each eligible individual and $1,400 for each qualifying dependent claimed on the 2021 tax return. For example, a married couple filing jointly with two qualifying dependents could have a maximum potential credit of $5,600 ($1,400 x 4).
Taxpayers needed to know the total amount of EIP3 received. This information could be found on IRS Notice 1444-C, “Your Third Economic Impact Payment,” or by accessing the taxpayer’s online IRS account. The Recovery Rebate Credit Worksheet, available in the instructions for Form 1040 and Form 1040-SR, assisted in this calculation.
If the total EIP3 received was less than the calculated maximum potential credit, the difference could be claimed. For instance, if a taxpayer was eligible for $1,400 based on their 2021 income but only received $700 as an advance payment (EIP3), they could claim the remaining $700. If the full EIP3 was received, no additional credit was due.
Claiming the Credit on Your Tax Return
The credit was reported on Line 30 of Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, U.S. Tax Return for Seniors. This placement on the form was crucial for proper processing by the IRS.
Tax preparation software commonly guided users through the process of claiming this credit by asking relevant questions about EIPs received and eligibility. For those filing manually, the instructions accompanying Form 1040 provided a worksheet to determine the correct amount to enter on Line 30. The final calculated credit amount was then entered directly onto this line.