The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.
In April 2020, the American government sent out the first round of stimulus checks (also known as “economic impact payments”) to qualifying individuals. This financial relief was approved under the Coronavirus Aid, Relief and Economic Security (CARES) Act. This first check was for up to $1,200 per person. With the pandemic lasting longer than was initially expected, the second round of stimulus check funding was approved and sent out in January 2021. This time the amount was up to $600 per person.
Now, as another COVID relief package has been approved, a third stimulus payment is being sent out. This check amount will be the highest one to date—up to $1,400 per person.
Tax season has arrived again, and many people are wondering whether the stimulus is taxable, since all income is usually taxable unless expressly excluded. Luckily, the answer to this question is mostly a positive one: No, your stimulus checks aren’t taxable. However, they might affect some people’s tax refunds.
The stimulus money is not taxable income
The IRS considers the stimulus checks a tax credit, not income. Regarding the economic impact payments, the IRS website clearly states that if you received the money because you qualified, you won’t have to pay taxes on it.
The stimulus checks were a tax credit that was essentially paid out early. While a tax deduction lowers your taxable income, a tax credit is a dollar-for-dollar credit that decreases the amount of taxes owed. Usually, tax credits aren’t given out as checks, but an exception was made for the pandemic. The credit was sent out as a payment so Americans wouldn’t have to wait to file their 2020 tax return to receive the financial aid.
There has been some speculation that the stimulus payments were like an advance on your usual tax refund and, therefore, you won’t get your regular refund this year. However, that’s not true.
You won’t include the stimulus payments as part of your gross income, which means the stimulus payments won’t decrease your tax refund. See further down, however, for some state income tax implications that can inadvertently impact your tax refund.
Additionally, it’s important to note that since the stimulus checks aren’t considered income, they won’t affect a person’s ability to qualify for federal benefit programs or federal government assistance. Many people qualify for stimulus checks and unemployment insurance at the same time.
What is the Recovery Rebate Credit?
The Recovery Rebate Credit is for people who didn’t receive the stimulus money when they should have. This might have happened due to an error or because a person filed differently on their 2020 taxes versus their 2018 or 2019 taxes.
For example, if a 20-year-old filed as a dependent on their 2019 taxes, that would have disqualified them from the stimulus check. But if that same individual files independently on their 2020 taxes, they’re eligible to receive the money retroactively. Other things that could have changed your eligibility in 2020 include bearing a child or seeing a drop in income.
The Recovery Rebate Credit will show up as a potential line item on your Form 1040 income tax return. If you qualify and fill out Line 30, your stimulus money can be added as a credit to your income tax return. This means a person who claims the tax credit successfully will see their tax debt decreased or their tax refund increased.
Let’s say you qualified for the initial $1,200 stimulus payment and didn’t receive it. You complete your tax return and find you’re going to get $800 back. However, once you add in the $1,200 Recovery Rebate Credit, you’ll find the government actually owes you a $2,000 tax refund. The Recovery Rebate Credit is “refundable,” so you do get the money from the government after filing.
What is the deadline for filing taxes?
Last year, the IRS extended the tax deadline from April 15 to July 15, 2020. An extension was announced for 2021, pushing the deadline back to May 17. Generally speaking, the sooner you file, the sooner you can get your refund, so keep this in mind when considering when to do your taxes.
How will my 2020 taxes affect the third stimulus check?
The first two payments (of up to $1,200 and $600, respectively) were based on 2018 and 2019 tax returns. The third stimulus check will look at your most recent tax return to determine eligibility, so if you’ve already filed, that would be your 2020 taxes, but if you haven’t, that would be your 2019 taxes.
While your stimulus check won’t impact your federal taxes, it can affect some state taxes. Alabama, Iowa, Louisiana, Missouri, Montana and Oregon all allow for federal tax to be deductible against state taxable income.
So let’s say an individual who lives in Iowa received the first stimulus payment of $1,200 for themselves but didn’t receive the $500 for their qualifying dependent under 17 years of age. In this example, the individual received both of their qualifying payments for the second stimulus round, so they only missed out on the $500. So, this person adds the $500 credit to Line 30 on their Form 1040.
If the filer had owed $2,000 in federal taxes, they would now only owe $1,500. Before claiming the $500 Recovery Rebate Credit, this filer could have subtracted $2,000 from their taxable income on their state return. But since that number has been lowered to $1,500, their state tax liability will be higher.
What should I do with my tax refund?
People often mistakenly see their tax refund as “fun money” to spend on activities or purchases. In reality, financial experts always recommend you act wisely with your tax refund.
Jackie Beck is a debt reduction expert and the creator of the app Pay Off Debt. Beck encourages people to understand that their tax refund isn’t free money. Beck says, “It’s money you earned all year long. You worked for it, so you may as well use it to achieve your goals instead of blowing it.”
Some of the best ways you can spend your tax refund include:
- Paying off debt, especially high-interest debt like credit card debt or personal loans
- Increasing your savings, especially if you don’t have emergency savings
- Investing in stocks, bonds or mutual funds
- Donating to a good cause
- Investing in a service such as credit repair to improve your financial health going forward
Making good use of your tax refund can set you on the path toward a stronger financial future.
Reviewed by Cynthia Thaxton, Lexington Law Firm Attorney. Written by Lexington Law.
Cynthia Thaxton has been with Lexington Law Firm since 2014. She attended The College of William and Mary in Williamsburg, Virginia where she graduated summa cum laude with a degree in International Relations and a minor in Arabic. Cynthia then attended law school at George Mason University School of Law, where she served as Senior Articles Editor of the George Mason Law Review and graduated cum laude. Cynthia is licensed to practice law in Utah, North Carolina and Virginia.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.
Source: lexingtonlaw.com