COVID-19 and Direct Payments to Individuals: Considerations on Using Advanced Refundable Credits as Economic Stimulus (Congressional Research Service IN11247, March 17, 2020)
Summary
This Congressional Research Service Insight (IN11247), dated March 17, 2020 and written by Margot L. Crandall-Hollick, answers common questions about using an advanced refundable tax credit to send cash payments to households during the COVID-19 slowdown. It explains that a refundable credit is not limited by income tax liability, and that advancing a credit means paying it before the return for that year is filed. It uses the 2008 recovery rebates in P.L. 110-185 as the model: up to $600 per person ($1,200 for joint filers) plus $300 per dependent child, with the IRS issuing the first checks sixty-two days after enactment. It cites a 2017 CBO estimate that 251.9 million of 292.6 million individuals, or 86%, were included on a federal income tax return, and states that the tax system is limited in its ability to pay nonfilers quickly.
Summary drafted by a model from the document's text below and checked by script against that text before publication. It is a navigation aid, not a reading of what the document proves. Where AI is used
Full text
INSIGHTi
COVID-19 and Direct Payments to
Individuals: Considerations on Using
Advanced Refundable Credits as Economic
Stimulus
March 17, 2020
In response to concerns about an economic slowdown stemming from the COVID-19 pandemic,
policymakers have been considering a broad array of policy options. Some are targeted directly toward
the individuals and industries that may be most affected. Others would more broadly seek to stimulate the
economy. Among this latter category of policies, some have suggested a payroll tax cut, while others have
proposed direct cash payments—“recovery rebates”—to virtually all households. One mechanism to
provide cash payments relatively quickly is to create a new refundable tax credit and then advance it to
households before they would otherwise claim it on their income tax returns. A similar policy was enacted
most recently in 2008. This Insight addresses some common questions about advanced refundable tax
credits.
What is a refundable tax credit?
Tax credits reduce income taxes owed dollar for dollar; each dollar in tax credit is a one-dollar subtraction
from income tax liability. Nonrefundable credits are limited by the taxpayer’s income tax liability, while
refundable credits are not. Hence, taxpayers with little to no income tax liability—including many low-
income taxpayers—can benefit from refundable tax credits. Refundable tax credits targeted toward low-
income individuals and families are estimated to have relatively large stimulative effects compared to
other policies—a large “bang for the buck”—because low-income populations tend to spend these
amounts quickly. Some economists were concerned that the 2008 credit would not be effective because a
lump-sum payment might be saved rather than spent. Empirical evidence based on studying a prior rebate
found, however, that the rebate was largely spent.
Current refundable tax credits—the earned income tax credit (EITC) and the refundable portion of the
child credit—benefit low-income families that include workers and children. These tax credits are
received once a year when federal income tax returns are filed. Tax credit amounts are primarily based on
Congressional Research Service
https://crsreports.congress.gov
IN11247
CRS INSIGHT
Prepared for Members and
Committees of Congress
Congressional Research Service 2
the taxpayer’s earned income and number of qualifying children in the prior year (e.g., an EITC received
in 2020 when 2019 tax returns are filed is based on 2019 income and family composition).
What does “advancing” a tax credit mean?
Advancing a tax credit effectively means issuing a tax credit for a given year before the tax return for that
year has been filed (and before income taxes for that year have been calculated). The 2008 recovery
rebates for individuals included in P.L. 110-185 were refundable tax credits against 2008 income taxes.
However, taxpayers did not need to wait to file their 2008 income tax returns in early 2009 to receive
these credits. Instead, the law allowed the IRS to advance these credits in 2008, basing the advanced
amount on income and family structure information from tax returns filed for the 2007 tax year. The
credit equaled up to $600 per person ($1,200 for joint filers), with an additional $300 per dependent child.
Lower-income taxpayers tended to receive a smaller credit, while the credit phased out for taxpayers with
incomes over $75,000 ($150,000 for married joint filers).
Advancing tax credits based on prior data can pose challenges if any of the parameters used to calculate
the credit—like income and number of children—change from these prior values. For example, if a
taxpayer’s 2019 income is significantly greater than their income at the end of 2020, an advanced credit
estimated based on 2019 income may be larger than what a taxpayer is ultimately eligible for in 2020.
(Even if an advanced payment is a fixed amount per person [does not vary by income], the final amount
can still vary if family structure changes during the year.) This could result in taxpayers having to pay
back the excess credit when they file their 2020 income tax returns (in early 2021). Insofar as this is a
concern, policymakers can limit how much taxpayers have to pay back (for example, as is done with the
advanced premium assistance tax credit), or they can bar repayments of excess advanced payments
entirely, as was done with the 2008 recovery rebates.
How long would it take for the IRS to begin issuing
advanced credits?
Past experiences with the IRS issuing advanced refundable tax credits may provide some guide on how
long these policies take to implement. On January 28, 2008, H.R. 5140, which included the 2008 recovery
rebates for individuals, was introduced in the House. Two weeks later, on February 13, 2008, it was
enacted as P.L. 110-185. Sixty-two days later, the IRS began issuing the first one-time rebate checks.
More than 120 million taxpayers received their payments by mid-July 2008. Taxpayers who had filed
their 2007 tax returns and received a refund via direct deposit also received the 2008 recovery rebates via
direct deposit. Otherwise, paper checks were mailed out to taxpayers using address information from
2007 income tax returns. A 2007 tax return had to be filed to receive a recovery rebate check. Those who
did not receive a recovery rebate check could claim the benefit when filing a 2008 income tax return.
How many individuals could receive an advanced
refundable tax credit?
One concern that some have about using the federal tax system to administer direct cash payments to
households is that not all individuals in the United States file income tax returns—either because their
income is below the filing threshold or because they are not complying with federal tax laws. A 2017
CBO analysis estimated that of 292.6 million individuals who could be included on a federal income tax
return (as the taxpayer, spouse, or dependent), 251.9 million were actually included—or 86%. The study
estimated that the greatest share of nonfilers were lower-income individuals, especially those 65 years or
older. As was noted above, the 2008 recovery rebate could be claimed by taxpayers who did not file a
Congressional Research Service 3
2007 tax return. These nonfilers—which included many low-income individuals and seniors—could
claim the credit on their 2008 returns when they filed them in 2009. The federal income tax system is
limited in its ability to provide cash assistance to individuals quickly, particularly when those individuals
are nonfilers.
Author Information
Margot L. Crandall-Hollick
Acting Section Research Manager
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff
to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of
Congress. Information in a CRS Report should not be relied upon for purposes other than public understanding of
information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role.
CRS Reports, as a work of the United States Government, are not subject to copyright protection in the United
States. Any CRS Report may be reproduced and distributed in its entirety without permission from CRS. However,
as a CRS Report may include copyrighted images or material from a third party, you may need to obtain the
permission of the copyright holder if you wish to copy or otherwise use copyrighted material.
IN11247 · VERSION 2 · NEW
File and source
- File
- IN11247-covid2-direct-payments-faq.pdf
- Size
- 549,429 bytes
- SHA-256
- 5856d25a22c0fbcf45bb5de239b65fd83d0f5e0521d6d31918ce0758aafd39e2
- Original
- No public link identified.