Some Senate Republicans say they want to scale back President Biden’s proposed $1,400 relief payments. Last week, my Tax Policy Center colleague Howard Gleckman proposed a couple of ways to better target that assistance. Here is another: Use tax year 2020 information returns the IRS already is receiving to focus assistance on those who suffered the most financially from the pandemic.  

The IRS could make these payments relatively quickly, at modest administrative cost, and without additional reporting from most eligible taxpayers.

This plan would take advantage of the tax return filing calendar. Each year, no later than March 31, the IRS must receive information returns such as W-2s and 1099s for each individual that worked for an employer or received income from a financial institution or other business. So, IRS will soon have on hand information on most forms of income received by most individuals in 2020.

The cash payments could be targeted to taxpayers with the largest financial losses, as measured by the reduction in their incomes between 2019 and 2020. Congress would specify the eligibility criteria and credit parameters in the COVID-19 relief legislation, but here is one way it might work.

Income eligibility could be 2019 income of up to $150,000 for a married couple ($75,000 for singles and heads of household). However, only those whose incomes fell between 2019 and 2020 would be eligible for cash payments. Taxpayers whose incomes did not fall in 2020 could still be eligible for some payment, but it might simply be a fixed dollar amount as in the two COVID-19 relief payments enacted in 2020.

The payment amount would be a percentage of the reduction in the taxpayer’s income from 2019 to 2020, up to a capped amount. Assume this percentage is 25% and the capped relief payment is $5,000. Here is how it would work:

Example 1. A single individual earned $30,000 in 2019 but earned only $10,000 in 2020, a reduction of $20,000. Her cash payment would be 25% x $20,000 = $5,000—the maximum amount allowed.

Example 2. A married couple filing jointly had income of $80,000 in 2019, but their income fell to $50,000 in 2020, a reduction of $30,000. Using the cash payment percentage of 25%, the couple’s tentative cash payment would be 25% x $30,000 = $7,500. But their assistance would be capped at $5,000.

Some technical details.

• The cash payments would fully refundable income tax credits, so all eligible taxpayers would receive the full credit they are entitled to, whether or not they had any federal income tax liability in 2020.
• All taxpayers who were not a dependent of another taxpayer in 2019, and who meet the other eligibility criteria, would be eligible for the credit even if they did not file an income tax return for 2019.
• The credit amounts would not be subject to income tax, and would not be included in income for purposes of income-contingent federal benefits such as the EITC, SNAP (food stamps) and Medicaid.
• Credits would be based solely on the 2019 information and/or income tax returns and 2020 information returns.
• Because no information return is filed to report most forms of self-employment income, payments to self-employed taxpayers would need to be based on their 2020 income tax returns, which they could file in just a few weeks (filing season begins on February 12). The IRS also could create a special system to report just their 2020 self-employment income in advance of filing a 2020 income tax return.
• Individuals who changed their filing status between 2019 and 2020 because they got married or divorced, also would need to file their 2020 income tax returns or to report the change in their marital status using a special filing system created by IRS before getting a payment. In addition, special rules would be needed to compute the change in their income between the two years.
• Individuals could report adjustments for incorrect payments when they file their income tax returns for 2021.

Millions of workers and self-employed individuals lost their jobs in 2020. Many remain unemployed while others are working part-time, low-pay jobs that provide few if any benefits such as health insurance. Those suffering long periods of unemployment or underemployment are likely to be behind in their rent, mortgage, or credit card payments and facing food insecurity.

Thus, as Congress develops the next COVID-19 relief legislation, it could target aid to those whose incomes fell between 2019 and 2020. Of course, Congress could adjust income eligibility, percentage decline in income, or maximum payment. But the basic model would better target assistance to those who need it most—those whose incomes declined in 2020.