Will You Have To Pay Taxes on Your Stimulus Checks?
In response to the economic devastation caused by the coronavirus pandemic, Congress authorized a series of stimulus payments for Americans in 2020 and 2021.
As they were sent out in the midst of global upheaval, many Americans gladly accepted them without fully understanding the ultimate ramifications. The good news is that Congress sent out the payments with no strings attached. Here’s what you’ll need to know when you file your return for tax year 2021.
Are the Stimulus Payments Taxable?
Let’s get the good news out of the way: No, you won’t have to pay tax on any of your coronavirus-related stimulus payments. Although the IRS infamously requires Americans to pay tax on any and all sources of income, the stimulus payments were not considered income.
Payments Were Technically Tax Credits
The stimulus payments in 2020 and 2021 were not taxable income because they were actually advance payments of tax credits. A tax credit is a dollar-for-dollar reduction in the amount of your tax liability. Typically, you claim a tax credit when you file your taxes. The credit is used to offset any balance due; and, in the case of a refundable tax credit, any excess comes to you in the form of a refund.
Due to the severity of the pandemic, Congress determined that sending payments to Americans immediately was a better course of action than waiting for them to claim the credit on their tax returns. This provided rapid relief from the severe economic repercussions of the pandemic.
If taxpayers had been forced to wait until tax filing time to receive these credits, the financial consequences would have no doubt been much more severe. Nevertheless, the function — and taxability — of the stimulus payments was the same as if taxpayers had received a more traditional tax credit.
More Advice: How To Itemize Deductions Like a Tax Pro
You Can Claim Missed Payments as Tax Credits
If for some reason you didn’t receive the stimulus payments directly, you likely can claim them when you file your tax return.
As the payments were technically tax credits, you can claim them on your return just as you would any other income tax credit, such as the Earned Income Tax Credit. As with all credits, you could then use the stimulus credits to offset any outstanding tax liability.
If you end up claiming your stimulus credit when you file your taxes, it’s important to remember that it’s a refundable credit, as opposed to a nonrefundable credit.
The Child and Dependent Care Credit is an example of a nonrefundable credit, which can’t be used for more than you owe in taxes. For example, if you claim the $500 Child and Dependent Care Credit but you owe just $100 in taxes, you can only use $100 of the credit to offset your tax liability. You do not receive the additional $400 in the form of a refund.
But, with a refundable credit such as the stimulus credit, you’re entitled to a refund if the amount of your stimulus exceeds your tax liability.
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