If you earned more in 2019 than 2018, don’t file your 2019 taxes yet! Otherwise, file ASAP!
The right tax filing schedule could get you thousands in (poorly designed) Recovery Rebates. And Congress: Let’s just do UBI next time.
Late Wednesday night, the Senate unanimously passed the CARES Act, a $2.2 trillion relief package to address the Covid-19 pandemic. The House is expected to pass it on Friday.
Of all the components of the nearly-900-page bill, the Recovery Rebates will have the broadest and most tangible reach. Over 93 percent of tax filers will receive these one-time checks of up to $1,200 per adult and $500 per child.
There’s a catch, though. The amounts start phasing out for tax filers with income over $75,000 (single) or $150,000 (married), and that income comes from your latest tax filing: 2019 if you’ve filed, otherwise 2018.
Filers with lower earnings in 2020 than the year of the latest tax return (2018 or 2019) will get a credit on their 2020 tax refunds next year. But the reverse isn’t true; filers that get more from the current payment than they would have based on 2020 income don’t have to pay it back. So it’s in each filer’s interest to get as high a payment immediately as possible.
Treasury Secretary Steven Mnuchin said today that the checks will start coming in the next three weeks. That might mean it’s already too late, and those that haven’t filed for 2019 yet could be stuck with 2018 information. Or they might have a couple weeks. The IRS hasn’t given any information either way.
One thing’s for sure: there’s no need to worry about timing it around the normal April 15 tax day. The IRS extended the deadline to July 15.
That’s it on the PSA for maximizing the recovery rebate. If you’re interested in how to avoid poor policy design like this in the future, read on.
This is why you don’t means-test emergency relief money
There’s no good way to means-test outside the tax system. SNAP (food stamps), TANF (welfare), and Medicaid restrict to low-income households through an onerous process often involving in-person interviews, mandatory contact each time a recipient’s income change, and regular recertification of work/work-seeking and other circumstances. Unemployment insurance, currently facing stresses keeping up with new volume, also requires in-depth interactions. All these programs differ by state, or even by county, and a bunch of other small programs like discounted transit often just condition on SNAP receipt.
There’s especially no good way to means-test in the middle of an emergency, when Washington wants to help most of the country afford basic necessities in a matter of weeks. There’s no time or resources for anything like the SNAP process, and nationwide consistency is an essential ingredient for quick passage through Congress.
Using old tax data is the only way, and doing so doesn’t only penalize people for either filing too early or too late. What if a person got married or divorced since their last tax filing? Or had a child, or had a child age out of their household? Or even more complicated, if they got divorced and remarried? The IRS is going to have to make some tough calls to figure this out, and they’ll make mistakes that will force exes to figure out how to split the new money. And then what about the reconciliation in next year’s taxes?
Using taxes also means sending money by tax filing unit, which can create hidden discrepancies. For example, the Recovery Rebate only gives money for primary filers and child dependents. If someone claims a college-age child on taxes, or other adult dependents like an elderly parent or someone with a disability, they get $0 to help them through this crisis.
All this effort, cost, and complexity cannot possibly be worth a bit of savings from excluding the top 7 percent of households.
Instead, we should just give to everyone. Suppose we gave the $1,200 to every adult and $500 to every child. Based on the current population, that’d cost $348 billion, or an extra $56 billion above the $292 billion cost of the Recovery Rebates. That’s about 2.5 percent of the total CARES Act.
If we want to, we can effectively tax that money back next year. But even if we don’t, we can expect high income people to lose a larger dollar amount than other groups, based on past recessions. More progressive taxation is a fine way to save money — and we’ll surely need more taxes to pay off the relief costs once this is all over — but either way, most rich people will lose far more income than the couple grand they’ll get in rebates.
Some of this will still be slowed by transaction time. The Treasury will have to spend more effort reaching people without recent tax records, or without existing direct deposit for receiving tax refunds. We could speed this up in the future by offering everyone government bank accounts, or connecting them with direct deposit or debit cards like Social Security does. Other forms of universal transfers — even small ones like a carbon dividend or a child allowance — would create payment infrastructure that could be jacked up in times of need.
It might not be so long before this choice rears its head again. House Speaker Nancy Pelosi has said she’s considering more cash payments in the next relief bill. She should join the eight congresspeople from both parties who have called for making them universal. Crises are not the time for convoluted means-tests.
