Many people believe the IRS will consider the CARES Act stimulus checks as an addition to their gross income, which means they will 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 as 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. This means the stimulus check isn't included in gross income and isn't subject to taxes. The payment will not reduce a tax refund or increase the amount a taxpayer may owe on their 2020 tax return next year.
Read More: How Much Money is Taken Out of My Check For Taxes?
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.
For instance, suppose you owed the IRS $800 in taxes, and you had a refundable tax credit of $1,200. The IRS would give you a tax refund check of $400.
The beauty of the refundable tax credit is that you get the benefits of the money from the credit this year rather than having to wait until 2021 to use the credit on your 2020 tax return.
So, 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 Changes?
The government uses your federal income tax return for 2018 or 2019 to determine your eligibility for receiving a stimulus check. If you’ve already filed your tax return for 2019, that income will be used to determine your stimulus payment. The IRS will rely on your 2018 return to determine your stimulus check if you haven't filed a 2019 return.
If your 2020 income is higher than your income was for 2018 or 2019, the IRS won't force you to return the stimulus money, and you will not owe any taxes on the check. This would be true even if your income in 2020 goes above the $75,000 threshold.
Additionally, you won't forfeit any tax refunds from 2019 or 2020.
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. Nevertheless, they are 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?
Although you won’t owe the IRS any taxes on your stimulus check, there are other issues you may want to consider. For example, the IRS could take part or all of your stimulus payment if you’re past due on making child support payments. Or you could 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 are past due on an auto loan, a personal loan or even have an account overdrawn at the bank. In these cases, the bank does not need a court order to confiscate your funds.
- AARP: Will I Owe the IRS Tax on My Stimulus Payment?
- CBS News: Stimulus check: Do You Have to Pay Tax on the Money?
- MarketWatch: Do I Have to Pay Back My $1,200 Stimulus Check?
- Forbes: Do I Owe Taxes On My Stimulus Payment? Plus Other Tax-Related Questions
- Experian: Will the Stimulus Check Affect Your Taxes?
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.