Is Your Stimulus Check Taxable?
You may be wondering if you have to pay taxes on your second stimulus check.
The answer may surprise you.
by: Rocky Mengle
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.
Recovery Rebate Tax Credit
When you sit down to 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, stimulus checks are 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!
When Can You File Your 2020 Tax Return?
The IRS typically starts accepting tax returns for the previous calendar year in late January. However, because of staff shortages and backlogs created by the pandemic, and additional responsibilities associated with second-round stimulus checks and other new COVID-relief laws, the normal start date could slip into February. Once the IRS kicks off the filing season, you'll have until April 15, 2021, to file your 2020 tax return (unless you request an extension).
The sooner you file the sooner you can reap any benefits from the recovery rebate credit. That can mean getting a nice refund check more quickly, too. And don't forget that if you want your tax refund even faster, sign up for direct deposit. You'll get your money much sooner than if the IRS has to mail you a paper check.
Resource:
www.Kiplinger.com
