The federal government sent CARES Act stimulus checks to Americans in April 2020, December 2020, January 2021 and March 2021. The last two payments fell in the 2021 tax year, the return you'll file in 2022. Many people believe that the IRS will consider the checks as an addition to gross income, which means they'll owe more taxes or have their tax refund reduced. Neither of these assumptions is true.
Let’s clear up several questions and misconceptions about the coronavirus stimulus payment.
Will You Owe Taxes on Your Stimulus Check?
According to the IRS, the stimulus payment from the CARES Act is not considered to be taxable income, and taxpayers will not have to pay tax on it. Technically, the economic impact payment is a tax credit, but this isn't clear to most people.
The stimulus checks are considered as fully refundable tax credits for 2020 and 2021. This means the stimulus checks aren't included in gross income and they're subject to taxation. The payment will not reduce a tax refund or increase the amount a taxpayer may owe on their 2020 or 2021 tax returns.
What Is a Refundable Tax Credit?
A deduction on your tax return is a good thing, but a refundable tax credit is even better. A typical tax credit can reduce your taxes owed to zero, but it can't create a tax refund. A refundable tax credit can.
Suppose you completed your tax return to realize that you owe the IRS $800. Now you realize you can go back and claim a refundable tax credit of $1,200. The credit would pay that $800 and the IRS would give you a tax refund check of $400 for the difference.
The beauty of a refundable tax credit is that you get the benefits of the money from the credit immediately rather than having to wait to claim it when you file your tax return.
There’s no need to worry about setting aside a portion of your stimulus check to pay taxes.
Read More: Do I Need to File Taxes If I Didn't Work?
What If Your Income Changed?
The government used your federal income tax return for 2018 or 2019 to determine your eligibility for receiving a stimulus check. The income reported on your 2019 tax return determined your stimulus payments. The IRS relied on your 2018 return to determine your stimulus check if you hadn't yet filed a 2019 return.
The IRS won't force you to return the stimulus money if your 2020 or 2021 income was higher than it was in 2018 or 2019. You won't owe any taxes on the check. This would be true even if your income in 2020 or 2021 goes above the $75,000 threshold. You won't forfeit any tax refunds in future years, either.
Read More: When Can I Stop Filing Income Taxes?
What If You Haven’t Filed Any Tax Returns?
Some military veterans, railroad retirees and Social Security recipients aren't required to file tax returns. But they're still entitled to receive a $1,200 stimulus check that does not get reported and will not be taxed.
Could Anything Else Affect My Stimulus Check?
You won’t owe the IRS any taxes on your stimulus check, but there are some other issues you may want to consider going forward if more stimulus checks should be coming. The IRS is entitled to take part or all of your stimulus payments if you're past due on making child support payments. Or you might have to turn the money over to a debt collector if a judge has ordered you to make payments through the courts.
Another possibility is that a bank could seize your stimulus check if you're past due on an auto loan, a personal loan or even have an account overdrawn at the bank. The bank does not need a court order to confiscate your funds in these cases.
- AARP: Will I Owe the IRS Tax on My Stimulus Payment?
- CBS News: Stimulus check: Do You Have to Pay Tax on the Money?
- Forbes: Do I Owe Taxes On My Stimulus Payment? Plus Other Tax-Related Questions
- Experian: Will the Stimulus Check Affect Your Taxes?
- USA.gov: Advance Child Tax Credit and Economic Impact Payments – Stimulus Checks
James Woodruff has been a management consultant to more than 1,000 small businesses. As a senior management consultant and owner, he used his technical expertise to conduct an analysis of a company's operational, financial and business management issues. James has been writing business and finance related topics for work.chron, bizfluent.com, smallbusiness.chron.com and e-commerce websites since 2007. He graduated from Georgia Tech with a Bachelor of Mechanical Engineering and received an MBA from Columbia University.