Back in April of 2020, the first wave of stimulus payments were delivered to Americans in response to the COVID-19 pandemic. A second round of stimulus checks were sent out in early 2021. If you received one of these Economic Impact Payments, you may have questions regarding how they will affect your upcoming 2020 federal taxes. Here's what you should know:
Stimulus Checks are not Income
One specific concern that has been on the minds of many Americans, is whether or not the stimulus payments will need to be included as income when filing 2020 taxes later this year. The answer is no, the stimulus checks that were provided in 2020 and 2021 are not includible in your gross income. As the IRS explains on their website, taxpayers are not to include any Economic Impact Payments in their taxable income when they file their federal tax returns. In other words, you will not pay income tax on these payments. The IRS also explains that these stimulus payments will not be counted as income when determining your eligibility for federal government assistance or benefit programs.
Stimulus Checks Will Not Reduce Your Tax Refund or Increase the Amount You Owe
Because the Economic Impact Payments are not considered “income”, they will not reduce any tax refund you may be eligible for, nor will they increase any tax amount that you may otherwise owe.
This has been a point of confusion for many Americans, as some have erroneously referred to the 2020 and 2021 stimulus payments as an “advance tax refund”. In actuality, they were an “advance tax credit”. While some tax credits reduce your overall tax bill, others (like the 2020 and 2021 stimulus payments) are fully refundable. The stimulus payments that were sent out in 2020 and in early 2021 were an advance payment of the “Recovery Rebate Credit”. So, if you received your stimulus check in early 2020 or January 2021, you were receiving that credit early. The Recovery Rebate Credit is an entirely new tax credit that is added to any other tax credits that would normally be used to determine your tax refund or amount owed.
Do I Need to Claim the Recovery Rebate Credit on My 2020 Tax Return?
If you were eligible for an Economic Impact Payment in 2020 and 2021, and you received them, then you do not need to complete any information about the Recovery Rebate Credit on your 2020 federal tax return. However, if you were eligible for the stimulus payments and did not receive them, you can claim the Recovery Rebate Credit when filing your 2020 taxes.
Will I Need to Return My Stimulus Payment if I No Longer Qualify Based on my 2020 Tax Return?
There is also some confusion about exactly what information is being used to qualify individuals for the recent stimulus payments. Depending on when you filed your 2019 taxes, the first stimulus payment that went out in the spring of 2020 was based on either your 2018 or 2019 tax return. If you hadn’t yet filed your 2019 taxes, the payment was calculated based on your 2018 tax information, and if you had already filed, it was based on your 2019 tax return. The second stimulus check however, was based on information from 2019 tax returns only.
Because of this, many Americans are wondering what happens if their 2020 tax information differs significantly from their 2018 and/or 2019 returns. For example, what if your income increased in 2020 and is now above the maximum used to determine payment eligibility? Or, what if you received a higher stimulus payment amount because you claimed a qualifying child on your 2018 or 2019 tax return, but now that child is over the age of 17 and you’re no longer claiming them on your 2020 tax return?
According to the IRS, individuals will not be required to pay back any of their Economic Impact Payments in the event that they no longer qualify for a payment (or qualify for a lesser amount) based on the information in their 2020 tax return.
Unemployment Benefits are not the same as Stimulus Payments
It’s important to note that if you received unemployment benefits in 2020, those are taxable and must be reported on your 2020 federal income tax return. Although unemployment payments come from the government, just like the Economic Impact Payments, they are considered a replacement of your lost income rather than a tax credit.
2020 was a rough year for the United States, and the Economic Impact Payments that were provided in 2020 and 2021 were undoubtedly a huge relief to many Americans. While there has been much confusion regarding their potential impact on taxes and income, the good news is that they shouldn’t result in additional work for most taxpayers. As always, BankFive highly recommends consulting with a financial expert or tax professional before making any major decisions regarding your finances. For the most up-to-date information regarding Economic Impact Payments and the filing of 2020 tax returns, please visit https://www.irs.gov/coronavirus-tax-relief-and-economic-impact-payments.
Stimulus Checks are not Income
One specific concern that has been on the minds of many Americans, is whether or not the stimulus payments will need to be included as income when filing 2020 taxes later this year. The answer is no, the stimulus checks that were provided in 2020 and 2021 are not includible in your gross income. As the IRS explains on their website, taxpayers are not to include any Economic Impact Payments in their taxable income when they file their federal tax returns. In other words, you will not pay income tax on these payments. The IRS also explains that these stimulus payments will not be counted as income when determining your eligibility for federal government assistance or benefit programs.
Stimulus Checks Will Not Reduce Your Tax Refund or Increase the Amount You Owe
Because the Economic Impact Payments are not considered “income”, they will not reduce any tax refund you may be eligible for, nor will they increase any tax amount that you may otherwise owe.
This has been a point of confusion for many Americans, as some have erroneously referred to the 2020 and 2021 stimulus payments as an “advance tax refund”. In actuality, they were an “advance tax credit”. While some tax credits reduce your overall tax bill, others (like the 2020 and 2021 stimulus payments) are fully refundable. The stimulus payments that were sent out in 2020 and in early 2021 were an advance payment of the “Recovery Rebate Credit”. So, if you received your stimulus check in early 2020 or January 2021, you were receiving that credit early. The Recovery Rebate Credit is an entirely new tax credit that is added to any other tax credits that would normally be used to determine your tax refund or amount owed.
Do I Need to Claim the Recovery Rebate Credit on My 2020 Tax Return?
If you were eligible for an Economic Impact Payment in 2020 and 2021, and you received them, then you do not need to complete any information about the Recovery Rebate Credit on your 2020 federal tax return. However, if you were eligible for the stimulus payments and did not receive them, you can claim the Recovery Rebate Credit when filing your 2020 taxes.
Will I Need to Return My Stimulus Payment if I No Longer Qualify Based on my 2020 Tax Return?
There is also some confusion about exactly what information is being used to qualify individuals for the recent stimulus payments. Depending on when you filed your 2019 taxes, the first stimulus payment that went out in the spring of 2020 was based on either your 2018 or 2019 tax return. If you hadn’t yet filed your 2019 taxes, the payment was calculated based on your 2018 tax information, and if you had already filed, it was based on your 2019 tax return. The second stimulus check however, was based on information from 2019 tax returns only.
Because of this, many Americans are wondering what happens if their 2020 tax information differs significantly from their 2018 and/or 2019 returns. For example, what if your income increased in 2020 and is now above the maximum used to determine payment eligibility? Or, what if you received a higher stimulus payment amount because you claimed a qualifying child on your 2018 or 2019 tax return, but now that child is over the age of 17 and you’re no longer claiming them on your 2020 tax return?
According to the IRS, individuals will not be required to pay back any of their Economic Impact Payments in the event that they no longer qualify for a payment (or qualify for a lesser amount) based on the information in their 2020 tax return.
Unemployment Benefits are not the same as Stimulus Payments
It’s important to note that if you received unemployment benefits in 2020, those are taxable and must be reported on your 2020 federal income tax return. Although unemployment payments come from the government, just like the Economic Impact Payments, they are considered a replacement of your lost income rather than a tax credit.
2020 was a rough year for the United States, and the Economic Impact Payments that were provided in 2020 and 2021 were undoubtedly a huge relief to many Americans. While there has been much confusion regarding their potential impact on taxes and income, the good news is that they shouldn’t result in additional work for most taxpayers. As always, BankFive highly recommends consulting with a financial expert or tax professional before making any major decisions regarding your finances. For the most up-to-date information regarding Economic Impact Payments and the filing of 2020 tax returns, please visit https://www.irs.gov/coronavirus-tax-relief-and-economic-impact-payments.