Most people who qualify for a stimulus check have already received their direct deposits, paper checks, or prepaid debit cards. But the payments, $ 1,200 for most singles and $ 2,400 for most married couples, have raised many questions about how they will affect taxes.
Chief among them is whether the payments, which are designed to help families resist the economic impact of the coronavirus pandemic, are subject to income taxes. In other words, should people set aside a portion of the payment to pay the IRS when they file their 2020 tax returns?
“Something that a lot of people don’t realize is that stimulus payments are not taxable,” Christina Taylor, director of fiscal operations at Credit Karma Tax, told CBS MoneyWatch. “They are actually a down payment on a new credit on their 2020 federal income taxes.”
It is understandable that there is confusion among consumers. The official IRS and Treasury term for payments (economic impact payments) does not hint at the fact that payments are actually a type of tax credit, for example. Because checks are advances on a 2020 tax credit, taxpayers will have another opportunity to reconcile their income and dependent information when they file their 2020 tax returns in early 2021.
“If you didn’t qualify for the stimulus payment based on your income from the previous year, but you do qualify it based on your 2020 income, you can claim the stimulus payment as a credit on your 2020 tax return,” Taylor said. .
Meanwhile, many consumers focus on if a second stimulus control is in process, with the double-digit unemployment rate remaining and the additional $ 600 in weekly unemployment benefits due in late July.
What happens if my income falls in 2020?
The stimulus controls that were authorized by the CARES Act in March have income thresholds. Single taxpayers earning less than $ 75,000 qualify for the full payment of $ 1,200, while married couples earning less than $ 150,000 received $ 2,400. Payments are reduced by earnings above those thresholds, and cut entirely for single taxpayers earning more than $ 99,000 and for married couples with incomes above $ 198,000.
When the IRS sent checks starting in April, it based the payments on its 2019 or 2018 tax returns, which reflect the gains before the coronavirus pandemic stopped the economy in March. That means if you have higher income whose income fell in 2020 below the income thresholds for stimulus payments, you will get the added benefit when you file your taxes next year.
This is because the IRS will reconcile the tax credit with its 2020 income, and tax experts say it can only help you, not hurt you.
Families also receive $ 500 for each child under the age of 17, meaning families with children born or adopted in 2020 will get a $ 500 tax credit when they file their taxes next year, according to the IRS.
Will I have to pay back the stimulus money?
Let’s say your daughter was 16 when she filed her 2019 taxes, qualifying her for a payment of $ 500 since she was under 17 at the time. What happens when you file your 2020 taxes and your daughter is 17, over the age that qualified her for that stimulus money? Will you have to return the $ 500 to the IRS?
No, says the tax agency.
The same applies if your 2020 earnings place you above the threshold for a stimulus payment, while your 2019 or 2018 earnings were below the limit, the tax agency said.
“There is no provision in the law requiring the reimbursement of a payment,” according to the IRS website. “You will not be required to pay any payment when filing your 2020 tax return, even if your qualifying child turns 17 in 2020 or if her adjusted gross income increases in 2020 above the thresholds mentioned above.”
What about my tax refund?
Another question is whether the stimulus payments will affect your tax refund next year.
The answer is perhaps, but only if it works in your favor, according to Taylor of Credit Karma Tax.
“For example, if your 2020 income was less than the income used to calculate your stimulus payment, you may receive a larger stimulus payment in the form of a credit when you file your 2020 taxes next year, which could increase your refund, ” I note .
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