Everything You Should Know About Your Federal Government Relief Payment [Updated]

After extensive deliberations, the Senate has approved a bill that will issue relief checks to most Americans. This initiative is part of a $2 trillion economic relief package designed to support the economy amid the coronavirus crisis.

The checks will amount to up to $1,200 for each adult and $2,400 for couples filing jointly. Families will also receive $500 per child. To qualify, you must have a Social Security Number.

The amount you receive is determined by your adjusted gross income (AGI), which can be found on line 8b of your 2019 1040 form, or line 7 of your 2018 1040. If your AGI exceeds $75,000 annually (or $150,000 for couples), your payment will be reduced. The phase-out system will continue lowering your payment, eventually reaching zero once your AGI reaches approximately $99,000 per individual (or $198,000 for couples).

Forbes contributor Kelly Phillips Erb describes the phase-out process as follows:

For each $100 you earn above the threshold, your check will decrease by $5. For instance, if you're a single filer making $75,100, your payment will be $1,195 ($1,200 minus $5). If you're a single filer earning $85,000, your check will be $700 ($1,200 minus $500).

Your payment will be determined by the adjusted gross income on your 2018 tax return. If you’ve already filed your 2019 return, your payment will be based on your 2019 AGI. If your account details are on file (for example, from your most recent tax refund), you’ll receive the payment via direct deposit. If not, a check will be mailed to you.

The House of Representatives is scheduled to vote on and approve the bill on Friday. Following that, President Trump must sign it before the process of printing and mailing the checks can begin.

How to use your recovery rebate

The primary purpose of these payments is clear: to help individuals cover essential expenses during uncertain times, especially when many are unemployed. If you have bills to pay, the decision on how to allocate your relief check is straightforward.

However, if you are still receiving regular income, you might be wondering what to do with the extra funds.

“A word of caution for those who might view this as ‘fun’ money,” said Bobbi Rebell, a CFP and personal finance expert at Tally. “This money, if not immediately needed, should be saved for emergencies and added to your emergency fund. This is not the time to splurge or treat yourself.”

Even if you feel secure about your finances now, circumstances can change unexpectedly. Building an emergency fund or paying rent in advance could help you maintain stability and better handle the coming months.

“If you don’t need this relief payment for immediate living expenses, then it’s essentially a windfall,” said Eric Bronnenkant, a CFP and head of tax at Betterment. “The challenge with windfalls of $1,000 or more is that we’re often unprepared for them psychologically.” People tend to view windfalls as bonuses, he explained, and feel an urge to spend this 'extra' money. That’s why it’s crucial to have a plan for your stimulus payment even before it arrives. “Avoid the temptation to spend it on things you don’t really need,” Bronnenkant advised.

If you already have a robust emergency fund, Bronnenkant advises using your relief check to pay down high-interest debts such as credit card balances. You could also put the funds toward increasing your retirement savings or saving for significant goals, like funding a child's college education.

How Your Relief Payment Affects Your 2020 Taxes

Your check functions as an advance on a refundable tax credit. This means that if your payment is smaller than it should be based on your tax filings (for example, if you experience a loss of income during the year due to the coronavirus), the difference will be applied to your 2020 tax return, according to The Tax Foundation.

If you receive more than you should have (for instance, if you had consistent income in 2020 and even received a raise), there’s no need to repay the excess amount from your rebate check.

The last time taxpayers received a rebate was in 2008, when George W. Bush signed the Economic Stimulus Act of that year. Individuals received between $300 and $600, depending on their income from the previous year, with checks arriving about three months after the announcement.

However, the initiative didn’t stimulate the economy as Bush had hoped: Researchers later discovered that most recipients either saved their rebate or used it to pay off debt.

This article was updated on the same day of its publication to clarify that relief checks are based on an individual’s adjusted gross income, not their salary. The update also corrects a typo in the phase-out calculations and adds the 2018 AGI line for form 1040.