After three rounds of stimulus money, the IRS has made millions of direct deposits, handed out millions of paper checks, and provided a significant number of pre-paid debit cards. All told, the federal government estimates that full payment of all funds directly to families across the United States will end up costing $850 billion.
Tax season is currently in full swing, and with the extended deadline to file taxes (to May 17, 2021), many Americans are still in the throes of attempting to navigate how the stimulus payment will affect their taxes. Thankfully, the stimulus payments can only have positive effects on your tax refund. We have put together a quick FAQ about what you need to know about the connection between your income taxes and stimulus money.
If you received a stimulus check, how do these funds affect taxes?
Your stimulus payment or economic impact payment is technically a tax credit. As a tax credit, it reduces your tax obligations dollar-for-dollar. However, unlike many other tax credits, this credit is refundable, and it was provided in advance of getting any additional tax refund you might be entitled to receive.
Many people assume that your stimulus payment income should be added to your taxable income, but that is not the case. It is not considered income for any purpose. It will not have any effect on the amount of refund that you get after filing your taxes. It will also not be counted as income for determining federal government assistance or benefit programs.
Instead of being taxed on the payment, the IRS simply asks taxpayers to report their stimulus payment to ensure that they got the total amount of their payment that they are entitled to receive. Your 2020 tax forms will ask how much your first and second stimulus payments were (the third stimulus payment will be accounted for in the future), and if they were not as much as they should have been, that additional amount would be added to your 2020 tax refund. If you did not receive a payment at all, but you should have, for example, that credit will be added to offset any tax obligations or increase your tax refund.
Is the stimulus payment considered income?
No. The stimulus payment is a tax credit that does not count as taxable income. That means that you will not be taxed on any stimulus payments you have received.
Do you have to pay back the stimulus check?
Stimulus payments were calculated based on your 2019 tax returns. If your 2020 taxable income was higher than 2019, you might be worried about repaying a stimulus that you received. Thankfully, the IRS is not requiring anyone to have to repay stimulus money if they received too much or were not actually entitled to receive it at all.
Will my stimulus payment have any effect on my tax return?
For most people, your stimulus payment will not have any effect on your tax return. However, the IRS still asks taxpayers to report the amount they received as a stimulus payment. This report is only to ensure that you received as much stimulus as you were entitled to get. As a result, if the stimulus payment has any effect on your tax return, it will be to decrease your tax obligations or increase your refund.
Do I need to keep track of what I purchase with stimulus funds?
Thankfully, no. The economic impact payment or stimulus payment can be used in any way that you would like. The IRS is not asking individuals to only use the money for certain things or report how they used the funds.
If you would like to get additional information about stimulus payments and your income taxes, contact our tax planning and tax preparation advisors. You can schedule a consultation with our Meriden office by calling 203-872-9697. Set up an appointment with our Madison office by calling 203-457-8365.