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My parents claimed me on their 2019 taxes and received my third stimulus check, but I don’t qualify based on my 2020 taxes. Will the IRS ask for it back?

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Dear Quentin,

I’m confused. My parents claimed me on their 2019 taxes (which was fine and agreed upon). However, I got married and filed my own 2020 taxes. When the third stimulus checks were released, my parents had not filed their 2020 taxes yet, so they received stimulus money for me as their dependent (which they are more than willing to give me).

The problem is, based on my 2020 taxes, I’m not eligible for a third stimulus check because my husband’s and my income combined is over the limit. So the only reason I got the money was because the money was based off of my parents’ 2019 taxes.

Am I safe to spend the money? Or will the Internal Revenue Service want it back from me when the next tax season rolls around?

Confused

You can email The Moneyist with any financial and ethical questions related to coronavirus at qfottrell@marketwatch.com

Dear Confused,

Individuals making less than $75,000 a year in adjusted gross income would receive checks totaling that full amount. The payments decrease for individuals earning $75,000 and up — and they phase out completely for individuals making $80,000 or more and couples making $160,000 or more in adjusted gross income.

The $1,400 stimulus check is not a loan. This third stimulus check is an advanced tax credit on your 2020 taxes. If you don’t qualify under your 2020 income-tax filing, then it’s likely that the IRS will adjust that in your parents’ next refund and/or ask for payment. You could wait to see what the IRS does, of course, but that leaves another question: Should your parents pay it back?

You never got any stimulus payment; thus, you do not have any repayment obligation, says Scott Haislet, CPA and attorney at law in Lafayette, Calif. “The parents’ 2020 return should reconcile the problem. If the parents report on parents’ 2020 return all payments received (including the payment for the child received inappropriately), the parents’ return will reflect a charge for the overpayment.”


‘You never got any stimulus payment; thus, you do not have any repayment obligation.’


— Scott Haislet, CPA and attorney at law in Lafayette, Calif.

“Probably wise to cash the check. If parents try to return the check, it will credit a nightmare of back-and-forth correspondence with IRS, the burden for which far outweighs any possible charges for underpayment on parents’ form 1040 for 2020,” he adds. “The 2020 return from the newly married child will not be affected.”

As an aside, “agreed-upon” is not the proper way to determine if and when somebody is claimed on another’s return as a dependent, Haislet adds. “The qualifying conditions for dependency, filing status, etc., are published in IRS 1040 instructions or Publication 17. They are dizzying to the average American, but they must be followed to get the right reporting outcome.”

“Parties may reach an agreement about being claimed, but government ignores such agreement,” he says. “Dependency credit, filing status (e.g., in some cases head of household), earned income credit, etc. is determined on the facts, not on agreement (the principal exception is divorced parents agreeing to assign a child to one or the other).”

For those who have received clearly erroneous payments, it does not seem right to keep them. But wait until the end of the 2021 tax year first. Yes, many people received checks that they put in the bank or put toward items that are not considered necessities. But they qualified for the economic impact payment. The IRS gives some guidelines here on how to return an erroneous refund.

If it feels like a tax hack, give it back.

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These money and investing tips can help you stay upright against the market’s headwinds

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Don’t miss these top money and investing features:

These money and investing stories, popular with MarketWatch readers over the past week, can give you greater knowledge about the financial markets’ current condition as you monitor your portfolio and plan ahead. Plus, check out several short videos about whether to include bitcoin and other cryptocurrency in your portfolio and how to go about it if you do.

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Opinion: I took advantage of the 2020 RMD rule but now my 1099-R looks wrong — what should I do?

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Q: I took advantage of the 2020 RMD rule and returned what I had taken from my IRA thinking there would be no taxes. I just got a 1099-R showing the full RMD. That can’t be right. How do I correct it?

—Pauline

A.: Pauline,

If the 1099-R is incorrect, you will need to contact the firm that issued the statement to get it corrected. However, the 1099-R is probably correct.

Read: Are there new RMD rules this year?

Under the law, the firm issuing the 1099-R has no responsibility for reporting how much of a distribution is taxable. That responsibility rests on your shoulders as a taxpayer. The issuing firm need only report what was paid out of the IRA on 1099-R.

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That does not mean you will pay any tax. Any funds returned to the IRA by Aug. 31, 2020 is considered a rollover and is not taxable. Normally, Required Minimum Distributions (RMD) are not eligible for rollover, but IRS guidance after enactment of the CARES Act that waived RMD for 2020 changed that. The guidance stated the normal 60-day time limit for rollovers would not apply and instead instituted a fixed deadline of Aug. 31, 2020 to return such distributions and avoid taxation.

Read: It’s not too late to save on your 2020 tax bill — here’s how

I get similar questions about 1099-Rs every year. The reporting of the gross distribution looks like an error but in most cases, it is correct and the person receiving it simply hasn’t learned how it is accounted for yet.

Here’s how the accounting typically works.

As with any gross amount reported on Form 1099-R, you declare the amount that is not taxable when you file your 2020 tax return. What I hear most tax preparers would do in your situation is put the gross distribution amount from 1099-R on line 4a as per the normal procedure. Then, they would place a zero in 4b of your Form 1040, and put a note on the return near those lines that it was “returned to the IRA under the CARES Act,” “CARES Act rollover,” “CARES Act,” or simply “Rollover.”

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If you did not return all of distribution by the deadline, the portion that was not returned would be taxable. You would put that number on line 4b.

Read: 5 things to do if you inherit a Roth IRA

As I mentioned a moment ago, the discrepancy between the gross distribution reported and what should actually be taxable comes up in other situations. Three of the most common are other rollovers, Qualified Charitable Distributions (QCD), and distributions from accounts that had received after-tax contributions.

In all those cases, the reporting process looks like what I described above. You put the gross distribution on line 4a and the taxable portion on Line 4b. Then note why the numbers are different with “rollover,” “QCD,” or “See Form 8606” on the 1040. Form 8606 is the form used to determine the taxable amount of an IRA distribution when nondeductible contributions have been made to any of one’s IRA accounts.

If you have a question for Dan, please email him with ‘MarketWatch Q&A’ on the subject line.

Dan Moisand’s comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity.



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Video: Why Mike Novogratz sees bitcoin reaching $500,000 by 2024

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Galaxy Digital’s Mike Novogratz explains the outlook for crypto as Coinbase goes public.





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