When it comes to the IRS, typically any income you receive is subject to income tax. But there is one notable exception. If you received an economic impact payment in 2020, you won’t owe income tax on it now or in the future.
What Are Economic Impact Payments?
Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a large part of the U.S. population was issued money in 2020. These funds were designed to stimulate the economy due to the effects of COVID-19. Although they were sometimes referred to as stimulus checks, for many Americans, the payment was made electronically, as a direct deposit into the same bank account where they receive their tax refunds.
The wording of the IRS’s description of the economic impact payment has understandably led to confusion. The government agency refers to it as an “advance credit against the 2020 tax,” which can sound like it will cost you down the road. Actually, the IRS is issuing you an early tax credit, similar to tax credits you receive for other things. You simply received a credit on your 2020 tax return early, rather than waiting to file.
Who Gets Economic Impact Payments?
Although economic impact payments were designed to lessen the impacts of COVID-19 on the economy, it is limited by income. The IRS went by the adjusted gross income of a person’s most recent tax return. If you didn’t file in 2018 or 2019, you were automatically issued a payment of $1,200, or $2,400 if married filing jointly.
Here's the EIP you should have been issued, based on your reported adjusted gross income.
- Up to $75,000 ($150,000 for joint filers): Full payment of $1,200 ($2,400 for joint files)
- Over $75,000 ($150,000 for joint filers): Subtract $5 for each $100 over
- Over $99,000 ($198,000 for joint filers): Not eligible
EIP and Dependents
Anyone who’s filed a federal tax return knows that those with dependents are entitled to certain extra credits and deductions. This holds true with EIP payments, as well. In addition to the $1,200 per eligible adult that households received, there was also a small payment for any children living in the home.
For each qualifying child, you should have received a $500 stimulus payment. To qualify, the child will need to be:
- Aged 17 or younger at the end of 2019
- Must have a qualifying association with the taxpayer, whether as a biological child, adopted child, stepchild, foster child, half- or stepsibling, grandchild, niece or nephew
- Is eligible to be claimed as a dependent on your tax return
- Must be either a U.S. citizen, U.S. national or U.S. resident alien
- Has a taxpayer identification number like a Social Security number or an adoption taxpayer ID
Although taxpayers can have dependents older than 17 on their tax returns, this doesn’t apply to the EIP. Only children aged 17 and younger will qualify for the additional $500.
Taxes on Economic Impact Payments
Future coronavirus-related stimulus payments may be different, but the 2020 payment comes with no tax consequences. The IRS has explicitly stated you won’t owe taxes on the funds. “No, the payment is not income and taxpayers will not owe tax on it,” the IRS says. It has been classified as a tax credit.
One rumor that circulated when the stimulus was first announced was that it would come out of your 2020 refund. According to the IRS, “The payment will not reduce a taxpayer's refund or increase the amount they owe when they file their 2020 tax return next year.” Your stimulus payment also won’t be used to determine your eligibility for certain government programs.
Read More: Tax Credits: What Are They and How Do You Qualify?
Noting EIP on Tax Return
Although you won’t suffer tax repercussions of the EIP, you will need to include the payment on your tax return when the time comes. The IRS has promised to issue instructions on what you need to do when filing your taxes. Since so many are impacted by it, chances are any preparation software or forms you use will walk you through the process.
One thing you should do now, though, is make sure you’ve retained the notice the IRS sent you titled, Notice 1444, Your Economic Impact Payment. It should have been mailed to the last address the IRS had on you within 15 days of your payment being issued. You should keep that notice with your other income tax records so you can find it when you’re putting your return together.
Changes to Circumstances
The IRS has also said that if your circumstances change between the time you receive the EIP and the time you file your taxes, you won’t have to return the money. An example of this is if you received a $500 payment for a child you claimed on your most recent tax return, but the other parent will be claiming that child in 2020. You would not have to return the $500 you received in 2020 to the IRS in that case.
The IRS recommends keeping Notice 1444, Your Economic Impact Payment. If any questions arise, that notice will be the documentation used to verify that you should have received the payment that came to you.
Claiming Missed Stimulus Payments
What happens if you never received your payment? This is where your tax return will come in handy. If you missed the various deadlines and still don’t have your stimulus payment in hand, you’ll have one last opportunity to get it when you file your 2020 tax return.
Although the exact details of how to claim it haven’t been revealed yet, the IRS will provide details soon. You’ll claim the missed payment as a recovery rebate credit on your return, which will get you the payment you missed.
Tracing a Lost EIP
If you received Notice 1444 in the mail, stating your payment had been issued, but no payment came, you’ll need to first make sure you were eligible. Check the income requirements and make sure that, in the last tax return the IRS had on you, you did not exceed that threshold. If you were married and filed jointly, keep in mind that your spouse’s income may have put you over even if your own income fell below $99,000 for the year.
Once you’ve checked your eligibility and found that you should have received a payment but didn’t, you’ll need to conduct a payment trace. To get the ball rolling on this, call 800-919-9835 or mail or fax Form 3911, Taxpayer Statement Regarding Refund. The IRS will check to make sure the payment was never deposited, then issue a replacement. When you receive this, make sure you deposit it as soon as possible.
Social Security and EIP
Some U.S. residents aren’t required to file a tax return. If they receive Supplemental Security Income, Social Security Disability or Social Security, the IRS might not have had a recent tax return to use in processing your payment. The IRS set up a tool for non-filers to make it easy to provide the information they needed to issue your payment, but that tool has closed down.
Since it’s too late to claim your missing payment, you’ll need to file taxes for the 2020 tax year to claim your credit. You should have received a letter from the IRS stating the amount you’re scheduled to receive, Notice 1444. Use the amount in the letter to claim your rebate when you file.
Read More: Can You File Income Taxes When You Receive SSI?
Returning Erroneous Payments
If you were issued a stimulus check in error during the pandemic, the IRS expects you to return it. This includes if a check was mailed or deposited in the account of someone in your household who is no longer alive. Failure to return this money could come back to haunt you later if the IRS discovers the error.
If you’ve been issued a stimulus check you shouldn’t have gotten, you should follow the following instructions depending on whether the payment was issued via direct deposit or check.
- If the payment was issued by paper check and you still have it on hand, write “Void” on the back of the check in the endorsement area and mail it to the IRS location for your state, including a brief explanation for the return in a note included with the payment
- For direct deposit or a cashed check, submit payment via personal check or money order to the IRS location for your state, making it payable to the U.S. Treasury, and write 2020EIP and the Social Security number associated with the erroneous payment, along with a brief explanation in a note included with the payment
Paying Tax Debt
At the time of the initial announcements, many wondered if the economic impact payment would automatically be put toward any back taxes they owe. The answer is “no.” Even if you owe back taxes, you should have received the full amount of the stimulus payout you’re entitled to based on your adjusted gross income.
That said, there’s nothing stopping you from using part or all of the EIP to pay down your tax debt. You can use it for anything you want. If you owe back taxes, you can pay off your back taxes by direct debit of your bank account or by credit card through the IRS website.
Back Child Support and EIP
COVID-19 has been tough on household budgets, and if you’ve fallen behind on your child support payments, they may be affected. While the government has said the money will not be handed over to tax collectors or to resolve past garnishments, child support is not immune.
If you owe back child support, it’s important to note that your economic impact payment could have been waylaid by that debt. You’ll receive the part that wasn’t used to pay your past child support debt. If you filed Form 8379, Injured Spouse Allocation, in 2019, or 2018 if it’s your most recently-filed tax year, your check will be issued based on what the IRS ruled when you submitted that form.
EIP and Other Debts
Your debts could end up costing you your stimulus payment. This won’t happen directly. Unless you owe back child support, the IRS won’t hand your stimulus check over to a third party. But there is a way that the money could end up in someone else’s hands indirectly.
This is done if the creditor is granted legal access to seize the funds in your bank account. This could happen if your debt has been turned over to debt collectors. It’s important to note that leaders in some states have passed executive orders to keep that from happening, but it’s still a possibility.
The economic impact payment helped many taxpayers in 2020. If you received one of these payouts, you’ll need to make sure you follow the IRS’s directions as you file your 2020 taxes, but you’ll face no tax repercussions. It’s a tax credit, similar to the child tax credit that has been available to parents in recent years.
- IRS.gov: What People Really Want To Know About Economic Impact Payments
- IRS.gov: Economic Impact Payments
- IRS.gov: Economic Impact Payments: What You Need To Know
- IRS.gov: Who Can Get More Economic Impact Payment Money for Children
- IRS.gov: Economic Impact Payment Information Center — Topic J: Reconciling on Your 2020 Tax Return
- CNET: Deadline To Claim Your Stimulus Money This Year Is Passed. What To Do Now
- USA Today: Missing Your Stimulus Check? There's One Last Chance To Claim an Economic Impact Payment From the IRS
- IRS.gov: Economic Impact Payment Information Center — Topic F: Payment Issued but Lost, Stolen, Destroyed or Not Received
- IRS.gov: Taxpayer Statement Regarding Refund
- IRS.gov: Free File Fillable Forms Is Now Closed
- IRS.gov: Economic Impact Payment Information Center — Topic I: Returning the Economic Impact Payment
- MarketWatch: Do I Have To Pay Back My $1,200 Stimulus Check? Don’t Fall for These 5 Myths About the Stimulus Payments
- IRS.gov: Tips for Taxpayers Who Owe Taxes
- Forbes: Can Debt Collectors Grab Your Stimulus Check?
- Credit.com: Can Debt Collectors Take Your COVID-19 Stimulus Check?
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Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.