Do Stimulus Checks Affect Your Taxes?
In April 2020, millions of Americans began receiving the first Economic Impact Payments. These stimulus distributions — in the form of checks, debit cards and direct deposits — were part of the CARES Act, meant to help offset some of the financial pain of the COVID-19 pandemic.
But the stimulus checks didn’t stop there.
Over the past few months, Americans have received a smaller second direct payment, this time courtesy of the COVID-Related Tax Relief Act of 2020. And currently, President Joe Biden and Congress are in the midst of negotiations for another stimulus package that is expected to include yet a third round of stimulus checks.
With tax time rolling around, many recipients are asking, “How do these stimulus checks affect my taxes?” After all, in some cases, households received a few thousand dollars.
Here’s the scoop.
Stimulus Checks and Your Taxes
The quick-and-dirty answer is that, if you received Economic Impact Payments, you don’t owe a dime. From the IRS:
“No, the Payment is not includible in your gross income. Therefore, you will not include the Payment in your taxable income on your Federal income tax return or pay income tax on your Payment. It will not reduce your refund or increase the amount you owe when you file your 2020 Federal income tax return.
“A Payment also will not affect your income for purposes of determining eligibility for federal government assistance or benefit programs.”
Also, Americans will not be forced to pay back any of their stimulus checks if their financial situation has changed for the better in the past couple of years. In other words, if you were eligible for a certain dollar amount based on your 2018 or 2019 tax return, but would have been eligible for less based on your 2020 tax return, you don’t have to return the difference.
However, if your financial situation has perhaps changed for the worse, you might be able to enjoy extra tax savings this year.
The Recovery Rebate Credit
The IRS has added a Recovery Rebate Credit to Form 1040. This credit is available to people who would be eligible for more money in Economic Impact Payments based on their 2020 tax returns than their 2019 or 2018 returns.
The amount of the credit is based on the first two stimulus checks. Single filers are eligible for as much as $1,800 in credits (representing $1,200 for the first payment, $600 for the second), while couples filing jointly are eligible for as much as $3,600. Those who claim children age 16 or younger as dependents are eligible for up to $1,100 per child ($500 from the first stimulus program, $600 for the second).
Exactly how much credit you’re eligible for is determined by your income, and how much in stimulus payments you’ve already received. For instance, single filers’ eligibility starts to shrink at adjusted gross incomes (AGI) above $75,000 for 2020, while household eligibility starts to shrink at 2020 AGI of more than $150,000. You then subtract the amount of the stimulus payments you’ve already received from the amount of credit you should be eligible for based on your income. That’s your final credit amount.
The tax professionals at McManamon & Co. specialize in small to midsize businesses operating across a broad spectrum of industries. If you’re a business owner looking to make better sense of your tax situation, or improve your tax strategy to maximize deductions and credits, call us at 440.892.8900, or contact us online.
And no matter who you are, if you’re just looking to improve your tax knowledge, check out our other blog posts.
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