What You Need to Know About Stimulus Payments and Your Taxes

When it comes to taxation in the United States, it seems anything and everything is fair game. There are property taxes, sales taxes, taxes on capital gains and even estate taxes (also known as “death taxes”). Depending on where you live, you may also be liable for school taxes. If you have your own business you’ll have to pay business taxes, too.

It doesn’t end there.  If you happen to win the lottery, the state and federal government will tax that, as well. Speaking of the federal government, what happens if it “gives” you money? Do you have to pay taxes on that? Keep reading to find out.

What You Need to Know About Stimulus Payments and Your Taxes
Man handing Stimulus check to people with the USA flag on the Background. The US government is preparing to send out direct payments to help individuals amid the coronavirus pandemic

What is the Third Round of Stimulus Checks?

The official name for a so-called stimulus check is an “Economic Impact Payment.” In 2020, the U.S. government began issuing these payments to eligible individuals and families affected by the COVID-19 pandemic.

So far, two payments have been issued to most taxpayers and qualified non-filers by direct deposit, or in the form of a check or debit card. Now more stimulus payments are on the way. This is often referred to as the third round of stimulus payments.

The latest news on stimulus payments is that individuals who make up to  $75,000 will now get $1,400 economic impact checks from the government. Couples who make up to $150,000 will receive $2,800 checks. Finally, families (households) will get  an additional $1,400 for each dependent child claimed on their most-recent tax returns.

What You Need to Know About Stimulus Payments and Your Taxes

Do I Need to pay Taxes on Stimulus Payments?

So far, most Americans have gotten $1,800 from the first two rounds of economic impact payments. In most cases this amount included $1,200 from the first payment and $600 from the second.

The good news is none of that is subject to taxation. In other words, you do not have to include it as income on your 2020 tax return. The same stipulation applies to your next stimulus check, too.

As the Internal Revenue System or IRS puts it: “The payment is not income and taxpayers will not owe tax on it. The payment will not reduce a taxpayer’s refund or increase the amount they owe when they file their 2020 or 2021 tax return.”

Important Information About the Recovery Rebate Credit

But, you may be thinking, that doesn’t make any sense. If lottery winnings are subject to taxation, why don’t we have to pay taxes on our stimulus money? Well, it is a little confusing, but the answer has to do with the way federal legislators structured the payments.

Technically, your stimulus payment is an “advance refundable tax credit” for 2020.

In most cases, the ratio assigned to tax credits is 1:1. In other words, your tax liability is reduced by $1 for each credit. Refundable tax credits can reduce your tax liability to zero, and the government simply refunds the balance (if any). So, let’s say you owe the IRS $1,000 but you have a refundable credit for $1,200. The government would send you a check for $200. An advance credit, the taxpayer gets his or her money before filing his or her taxes.

Basically, by receiving a stimulus check, you have benefited from this type of early tax credit, called the Recovery Rebate Credit. And the best part is, you have also been spared the tedious paperwork associated with getting such generous tax relief.

Unfortunately, you will have to do some paperwork to get a Recovery Rebate Credit  If you were qualified but never received an economic impact payment in the first or second round, or you got less than you should have,  you will have to ask the IRS to make up the difference. You can do this by using the accompanying instructions and worksheet to complete the appropriate section on 2020 Form 1040 or Form 1040-SR.

What You Need to Know About Stimulus Payments and Your Taxes

Should I Return a Stimulus Payment if I Earned More in 2020?

Now that’s settled, you may have another question. What if you made more in 2020 than in previous years, so you weren’t really eligible for the stimulus funds you received? Do you have to return it?

Experts say there is no need to worry. That’s because the IRS has indicated it  won’t reclaim any overages. There’s no need to report the amount received, or even repay the federal government.

These are the ways your Third Stimulus Check Can Affect your 2020 taxes

If you are wondering if your third stimulus check can affect your 2020 taxes, the short answer  is “yes,” for a couple of different reasons.

First, how much you get in your third economic impact payment depends on your most recent tax return. This is most likely your 2019 or 2020 tax return. The IRS will use the one it actually has on hand when it calculates your payment.

Even if your personal and/or financial circumstances were drastically different for those two tax years, you may still get the full amount. Then again, you may not. If you do not get the stimulus payment for which you are currently qualified, you’ll have to claim the difference when you file your 2021 tax return next year.

Secondly, the distribution of the third-round stimulus checks is coinciding with the  2020 tax season. The traditional deadline for filing federal (and most state) income tax returns is April 15. However, the IRS recently announced that it has extended the deadline for individual taxpayers until May 17, 2021.

Even so, experts are urging taxpayers to file their 2020 returns as soon as possible. That way the IRS will have your most current information on hand when it calculates the amount of your third-round stimulus payment.

How do Stimulus Checks Impact Tax Refunds?

Now to answer some of the most pressing questions Americans have about stimulus checks and tax refunds.

First, are the stimulus checks a tax refund? The answer to this question is simply, “no, they are not.” Your tax refund is money you receive from the IRS (and/or state) because you paid more in taxes during the year than required. The economic impact payments are based on adjusted gross income as reflected on your tax return, not on how much tax you have paid during the year.

To clarify further, an EIP is not an advance on your tax refund, nor will it reduce the amount of your tax refund. Having said that, if you request missing money from previous stimulus payments on your 2020 tax return as detailed above the IRS will combine that amount with your refund. 

The next most pressing question is, when will stimulus checks arrive? At a recent briefing, White House Press Secretary Jen Psaki said the President expects a significant number of Americans to get their checks by the end of March.

Finally, a question on the minds of many Americans is, can you get a stimulus check if you owe taxes? Yes. The government has indicated that it will not issue reduced stimulus payments to people who owe back taxes. The IRS also announced recently that it will not seize funds from Rebate Recovery Credits  (claimed from past stimulus payments) to offset back taxes.

However, the same stipulations do not apply to private debt collectors. So if a credit card company or any other lender secures a judgment against you, it may be able to garnish your stimulus payments.

Lastly, you may be wondering, will child support take stimulus funds?  In the past there was a direct connection between child support and stimulus checks. If you were behind on your child support payments, child support could garnish your stimulus funds. That is no longer the case. You will get your whole stimulus check, even if you are still past due on your child support payments.

Information for Nonfilers

The IRS classifies the following groups as “nonfilers.” People who are part of the SSI or SSDI programs; single people under age 65 who make less than $12,200; married people who are not yet  65 with an income of less than $24,400; single people who are at least 65 or  with an income of less than $13,850; married people who are at least 65  with an income of less than $27,000; and veterans and Railroad Retirement beneficiaries.

As the designation indicates, people in these groups don’t usually have to file federal tax returns. That does not preclude them from filing if they have gotten any health care tax credits or subsidies. In fact they have to file to keep getting them. “Nonfilers” must also file  to receive   any taxes withheld from their pay, or to get some refundable tax credits. If  you are in one of these groups and you’re missing any money from past stimulus payments you will have to do that this year.

However, if you are simply concerned about getting your third stimulus payment, you should be able to get it without any hassles if you already receive federal benefits through programs listed above.

The bottom line

Clearly, this is a lot to take in. If you have questions or concerns about the third round of EIP, or how to claim missing funds from the first or second round, it is important that you consult a qualified tax professional. Barring that, you can always ask a legal (to Moshes Law for example) or financial advisor for help.