In mid-April, the government began sending out direct payments to Americans as part of the larger coronavirus stimulus package. While the money was much needed by those who lost income as a result of the pandemic, many are wondering whether there’s a catch. Will the money be taxed later? Is it simply a tax refund advance that will need to be paid back next year?
If you’re confused about how stimulus payments affect your taxes, you’re not the only one. Here’s what you need to know.
Are stimulus checks taxable?
The short answer: no.
“The stimulus is actually a new, refundable tax credit that will ultimately be computed based on your 2020 tax return information,” said Mark Jaeger, director of tax development for TaxAct.
That credit, technically known as an “economic impact payment” in
IRS parlance, is valued at up to $1,200 per qualifying adult and up to $500 per qualifying dependent child under the age of 17.
A tax credit is not actually income. Instead, it’s a specific amount of money that taxpayers are allowed to deduct from total taxes owed. Unlike tax deductions, which reduce your taxable income, credits are a dollar-for-dollar reduction in your overall tax bill. And since tax credits are not income, they can’t be taxed as such.
So why are these tax credits being awarded in the form of a check?
“Instead of Americans having to wait to file their 2020 tax return in order to claim this credit, the CARES Act permitted the Treasury Department to advance these credits to the American people,” explained Logan Allec, a certified public accountant and founder of personal finance blog Money Done Right.
Does getting a stimulus payment mean a smaller tax refund next year?
You may have seen some claims spreading on social media that the stimulus payment is simply a refund advance, and will be “taken out” of your tax refund for 2020. That’s not the case. “The stimulus payment is an advance of an entirely new credit,” Allec said.
He shared this example: Say the stimulus payments didn’t exist and you would be eligible for a $1,000 refund on your 2020 tax return.
Now let’s come back to reality where the stimulus does exist and you’re eligible for the full $1,200 payment. In this case, the refund reflected on your 2020 tax return would be $2,200 (your original $1,000 refund + the $1,200 thanks to the new credit). However, the government already sent you that extra $1,200 in advance in the form of a stimulus check.
So now, all else being equal, you would receive the same $1,000 refund on your tax return that you would have received if the new tax credit (and the related stimulus payments) had never been created.
In other words, if you qualify for a stimulus payment in 2020, your refund next year would actually be larger than usual, but you’re getting that extra chunk now. Alternatively, if you owe taxes, your tax liability will be reduced in the same manner.
Your stimulus check amount could change based on 2020 tax info.
Even though you won’t have to pay income taxes on your stimulus check, you will still need to report that you received one. Jaeger noted that since stimulus payments are currently being calculated against a prior year tax return (2018 or 2019, whichever is most recently available to the IRS), the amount you ultimately receive will be reconciled against your 2020 tax information when you file next year. There are three scenarios that could potentially come of that, he said.
For most tax filers, the credit will equal the stimulus payment they received, which leads to a net $0 on the 2020 tax return. “This scenario includes tax filers whose tax situation didn’t change much from the prior year to 2020,” Jaeger said.
In some cases, the tax credit will end up greater than the stimulus payment you received. Tax filers who fall into this situation include anyone who gains a new child dependent in 2020 or whose AGI was above the stimulus threshold in 2019, but fell below it in 2020. If this happens, the difference will either be added to your refund or further reduce your total tax bill. Additionally, the IRS has stated that if you didn’t receive the full credit amount you were supposed to in advance ― for example, you received the $1,200 for yourself, but not the $500 for each of your qualifying children ― you will be made whole on your 2020 tax return.
On the other hand, it could turn out that your stimulus payment was greater than the credit once it’s reconciled on your tax return. “Tax filers in this scenario would be anyone who has a dependent that turned 17 in 2020 or whose income increased over the threshold in 2020 but was under the threshold in 2019,” Jaeger said.
What’s yet to be seen, Allec noted, is whether the IRS will require those who received more stimulus money than they were entitled to repay the overage on their 2020 tax return. Although the CARES Act states that Americans whose stimulus payments ended up being too high should not have to pay back the difference, the IRS hasn’t released official guidance on this point.
One scenario in which the IRS has already pushed back, however, is with stimulus payments sent to dead people. Though millions of Americans are still waiting to receive their checks, the IRS erroneously sent out payments to deceased individuals and is now advising survivors to return the money. It’s not clear what the consequences are for failing to do so.
Post Courtesy of Yahoo.com/huffpost