I’ve heard the question many times: Will I have to pay tax on my stimulus check? The tax code says you have to pay taxes on “all income from whatever source derived,” unless it’s specifically exempted or excluded. That’s a pretty broad definition that seemingly would include money from the government. And, strictly speaking, there’s no specific exemption or exclusion for stimulus check money. So, stimulus checks are taxable – right?
Wrong! There’s a loophole in the law that prevents you from having to pay taxes on the stimulus check money you get from Uncle Sam. As it turns out, your stimulus check isn’t “income” after all, according to the law. Instead, it’s simply an advance payment of a tax credit. And tax credits aren’t taxable income.
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Recovery Rebate Tax Credit
When you file your 2020 federal income tax return (Form 1040), you’re going to see a new line on the second page for the “Recovery rebate credit.” Pay close attention to that line, especially if you didn’t receive a full (or any) first- or second-round stimulus check, you didn’t file a 2018 or 2019 tax return, you’re married and one spouse doesn’t have a Social Security number, your income dropped in 2020, you had a baby in 2020, you’re a recent college graduate, or you otherwise had a significant change of circumstances in 2020. If you’re eligible for a stimulus check, this credit could save you a lot of money.
Your stimulus check and the credit amount are calculated in the same way. However, the first two stimulus checks were based on information from either your 2018 or 2019 tax return (only 2019 returns for second-round stimulus checks). The tax credit is based on what you put down on your 2020 tax return. So, the failure to file a 2018 or 2019 return, or a change of circumstances from 2019 to 2020, could result in a difference between the amount of your stimulus checks and the credit amount.
If the credit is higher than the combined total of your stimulus checks, your 2020 tax bill will be lower, and you might even get a refund. If your stimulus checks were higher than the allowed credit, you get to keep the difference. So, you win either way!
Third Stimulus Checks
Congress is working on a COVID-relief bill that would authorize a third round of stimulus checks. If that bill is passed, the next round of payments would be an advance payment of a tax credit – just like the first two stimulus check payments. So, as it stands right now, your third stimulus check won’t be taxable.
Also, the way the COVID-relief bill is written, the same type of recovery rebate credit allowed for the 2020 tax year would be available for 2021 returns, too. So, if you don’t receive a third stimulus check, or receive less than what you’re entitled to, you might be able to claim a credit for the amount you’re owed on your 2021 tax return. (You won’t file that return until 2022.)
For more information on the current third stimulus check proposal, see The Current Plan for a $1,400 Third Stimulus Check.
Source: kiplinger.com