If you received a stimulus check or a stimulus payment in another form from the federal government, you might be wondering how the stimulus money you received will impact your 2020 tax return. You are not alone.
At Cook Martin Poulson, we work with clients on their tax returns regularly, so after the first round of stimulus checks, we received a lot of inquiries asking this question:
Will the stimulus check be taxed next year?
That's an important question to ask and answer. The truth is that people who received stimulus checks should understand how those payments will impact their 2020 taxes -- and how upcoming payments may impact their 2021 tax returns. Here's what you need to know.
Will I Have to Pay the Stimulus Check Money Next Tax Season?
The most important question for taxpayers this tax season is whether they will be expected to repay the stimulus check money when they file their 2020 tax return. It's a common concern and we hope the answer will eliminate your anxiety.
According to the Internal Revenue Service, economic stimulus payments do not count as income and therefore, are not taxable. You are not required to report your stimulus money as income when you file your 2020 tax return. In fact, the Internal Revenue Service pushed back the date when they will start processing 2020 tax returns to February 12 to allow time to process the new round of stimulus checks.
Will My Stimulus Payment Reduce My Expected Tax Refund?
Another question that we have been hearing frequently is about the effect of stimulus checks on your tax refund. Here again, the answer is simple. As we stated above, the stimulus payments you have received do not count as income and have no impact on your tax refund if you have overpaid your taxes.
Your federal tax return is where you report all taxable income. Under the CARES Act and the two subsequent COVID-19 relief bills, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the Consolidated Appropriations Act of 2021, stimulus payments are intended as assistance to people who have lost income and jobs as a result of the COVID-19 pandemic.
Stimulus payments are not taxable income. Each stimulus bill has specified that people who receive stimulus checks are not required to pay back the money.
Recovery Rebate Tax Credit
The Recovery Rebate Tax Credit is intended to provide stimulus money to people who did not receive the full amount of the first or second round of stimulus money. If you were a nonfiler in 2018 and 2019, you may not have received a paper check or electronic deposit of the stimulus payment. The reason is that your 2018 and 2019 income would have been used to determine your eligibility and, with no income on file, your eligibility may have been overlooked.
If you did not file taxes in 2018 or 2019, then you may claim the Recovery Rebate Credit on your 2020 tax return. Even if you do not have income to report in 2020 and you are not required to pay taxes, you will still need to go through the tax return process to receive the money you are owed.
The main difference between the original stimulus payments and the recovery rebate credit is that the credit uses your 2020 income to determine your eligibility. You will need to know the number of stimulus payments you received to file your 2020 tax return and claim your tax credit. The same is likely to be true when you file your tax return next year if you have not claimed any stimulus money due to be paid in 2021.
Connection Between Taxes, Stimulus Checks and Dependents
People who have dependent children were some of the hardest hit by the economic downturn caused by the COVID-19 pandemic. Under the CARES Act, dependent children did not receive a stimulus check. However, parents received an additional $500 of stimulus money for each dependent child they supported.
The subsequent laws regarding stimulus checks have changed the rules for parents and their dependent children. Under the second round of stimulus payments, parents were eligible to receive an additional $600 in their stimulus check for each dependent child. That's a $100 increase per child.
Both the CARES Act and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 excluded adult dependents over the age of 16 from receiving stimulus checks. That meant that approximately 13.5 million adult Americans did not benefit from the first two rounds of stimulus checks -- a point of hardship for families with older children in high school or college, adult children with disabilities, or aging parents who live in their homes and rely on them financially.
The good news for Americans supporting adult dependents is that the third round of stimulus checks is scheduled to include payments of $1,400 apiece for each adult dependent, including children in school, adults with disabilities, and aging relatives who are claimed as dependents on your tax return.
As was the case with earlier stimulus checks, the amount of the stimulus payment you receive will depend on your income. Full payments will go out to Americans who are earning less than $75,000 as individuals or $150,000 if married and filing jointly.
Could the IRS Seize My Stimulus Payment if I Owe Federal Taxes?
If you owe money to the IRS, whether you have a payment plan set up or not, you might be concerned that the IRS or other government agencies could seize your stimulus payment to pay your debt. Here's what the IRS has to say about this issue:
The CARES Act limits offsets of Economic Impact Payments to past-due child support. No other federal or state debts that normally offset your tax refunds will reduce the payment.
This means that even if you owe back taxes or have a payment plan in place, you are still eligible to receive a stimulus check and the IRS or a state taxing agency may not seize your economic stimulus payment to satisfy your debt.
As you noted above, the one exception to this rule is back child support. If you or your spouse are in arrears on child support payments. the IRS can and will seize your stimulus check to pay what you owe. The rule regarding child support was lifted with subsequent economic stimulus checks.
However, it is important to note that the IRS is still not operating normally and is behind on processing returns. As a result, some people who are owed stimulus money still have not received it. Because the stimulus checks are technically tax credits, there is the possibility of some confusion when people who owe back taxes file their tax returns. If you typically put any refund you receive toward your back taxes, you may need help from a professional accountant to ensure that you receive a stimulus check if you need it to pay everyday expenses.
How to Report Stimulus Money on Your Tax Return
If you have received all the stimulus money you are owed, there is no need to do anything different on your 2020 tax return than you would do any other year. Simply report your taxable income -- which as noted above should not include stimulus money you received -- and take any deductions that you can.
However, what happens if you have not received stimulus money – or, you have received only a partial payment and you are owed more? If that happens, you will need to claim the Recovery Rebate tax credit when you submit your return to the IRS. Here are the steps to follow.
- Check your payment status on the IRS website, here. Follow the prompts to find out your status. If the website shows that you have not received a payment, then you may claim a credit on your 2020 tax return.
- Check to see if you received Notice 1444 or Notice 1444-B with a first or second stimulus payment. These notices went out to all taxpayers who received stimulus checks.
- Prepare your 2020 return. You will need to file either Form 1040 or Form 1040-SR to claim the recovery rebate credit. You must file a return even if you do not have income to report in 2020.
Once you file your tax return, you should receive your economic stimulus payment in the form of a refund. You can accelerate your receipt of the payment by providing the IRS with electronic deposit information. As a rule, electronic deposits reach taxpayers more quickly than paper checks.
COVID-19 Created Tax Challenges: Get Help with Your Taxes from Our Tax Professionals
The COVID-19 pandemic has created tax challenges for taxpayers at every income level. It can be challenging to navigate the new laws and calculate how much stimulus money you are owed. Even if you are accustomed to filing your own taxes, you may need assistance to determine the amount of stimulus money you have received and what you are still due to receive.
Working with an experienced tax professional will ensure that you receive all stimulus money and claim every tax credit that you are eligible to take. Schedule an appointment with one of Cook Martin Poulson's experienced tax specialists today.