Recovery Rebate Credits, Economic Impact Payments, and Divorce

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On February 16, 2021, the IRS announced that all legally permitted first and second-round Economic Impact Payments (also known as “stimulus payments” or “stimulus checks”) have been issued.  Beginning in April 2020, the IRS and Treasury Department began delivering the first round of Economic Impact Payments for qualifying individuals and families due to the economic crisis resulting from the coronavirus pandemic.  According to the IRS, the second round of payments were to be made by January 15, 2021, although some second-round payments may still be in the mail.  If individuals did not receive a payment, or receive the full amounts, they may still be eligible to claim the Recovery Rebate Credit (the first and second Economic Impact Payments are considered an advance of the credit), but must file a 2020 tax return in order to do so.  While Economic Impact Payments were based on 2018 or 2019 tax year information, the Recovery Rebate Credit is based upon 2020 tax year information.

For married couples who are separated and no longer living together or who have initiated a divorce action since filing their 2019 income tax returns, a contested issue may be who is entitled to benefit from the Economic Impact Payments and/or Recovery Rebate Credit.  While these benefits should be considered marital property subject to division between the parties, it does not necessarily mean that they must be divided equally between divorcing spouses.  Arguably, the same factors governing the division of marital property would apply to the division of these payments and credit.

When issuing the Economic Impact Payments, the IRS stated that they used the contact information provided in the taxpayer’s most recent tax returns to send payment.  This could be either by mailing a paper check to the taxpayer’s last known address or by direct deposit to a bank account previously designated by the taxpayer to receive a prior refund.  If one spouse no longer lives at that address or no longer has access to the bank account, the other spouse may receive the payment without the other knowing or benefiting from the payment.  Therefore, it is important for a spouse going through a divorce to request information and documentation from the other spouse about the receipt of any payments.  If a spouse believes that their spouse misappropriated a payment, they should document the receipt of the payment as best they can (the IRS has an online tool that may be helpful) and consult with a divorce attorney to discuss their options.

Divorcing spouses who qualify for these payments and credits will need to agree, or have a Court rule, on how to divide them.  This may include the first and second round of payments, the Recovery Rebate Credit, any future credit or stimulus payment (lawmakers are currently debating a third round of federal stimulus checks under President Biden’s $1.9 trillion coronavirus relief plan) which are based upon tax returns filed during the marriage (if the benefit is based on tax year information during years in which the spouses were married), and payments received for the benefit of both spouses and/or the spouses’ dependent children.  In addition to deciding how divorcing spouses will file income tax returns (jointly or separately), a final separation agreement for spouses who qualify for these payments should now include a provision to address the division of future stimulus payments and credits received after the parties’ divorce for both spouses and/or the spouses’ dependent children.  Any questions related to the Economic Impact Payments and the Recovery Rebate Credit (or any future stimulus payment or credit) for divorcing spouses should be discussed with a divorce attorney and an accountant or tax advisor.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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