The deadline to file your taxes for 2020 has been extended to May 15, so there is still time to map out your tax strategy. One area of ongoing confusion is how to claim stimulus checks. Everyone received two or more government stimulus checks in 2020 to help with expenses during the pandemic, but do you need to claim those checks as taxable income?
The short answer is, no! Money paid out in the form of stimulus checks isn’t considered taxable income. Receiving a stimulus check has no impact on your ability to qualify for federal assistance either. Even if you didn’t receive a stimulus check, you still may qualify for a stimulus payment in the form of a tax credit.
If you are still confused about how to account for claim stimulus checks on your taxes, here are some additional details to help you.
Economic stimulus payments are designed to help citizens pay their bills and increase consumer spending to improve the economy. Those stimulus payments aren’t taxable; they are a gift from the government. There is no need to claim stimulus checks since stimulus payments aren’t considered part of your income. That also means that the additional payments don’t affect your income tax bracket, so it’s essentially free money.
Everyone should have received two stimulus payments in 2020—a payment of $1,200 per adult and then a second payment of $600 per adult. To be eligible for the 2020 stimulus checks you needed to earn less than $75.000 per year if you are single or less than $150,000 per year if you are married and file a joint tax return.
Government stimulus payments are considered an advance payment of a tax credit, and tax credits aren’t taxable income. Since stimulus money is considered a tax credit, you may even qualify to get money back. If you pay taxes and aren’t considered a dependent on someone else’s income tax, then you are eligible to claim the tax credit.
There is a distinct difference between a tax deduction and a tax credit. A tax deduction is an expense that you can subtract from your taxable income. Once you calculate your total income, you subtract any deductions and that amount becomes your taxable income. A tax credit, on the other hand, is taken after you calculate your taxable income, so it is a dollar-for-dollar reduction in your tax bill.
If you didn’t receive the full amount you were due from the government stimulus program, you may be eligible for a tax credit.
There is a new entry on line 30 of forms 1040 and 1040-SR for 2020 for a Recovery Rebate Credit. If you were eligible and didn’t receive the full amount of the 2020 stimulus payments, then you can ask for the money you didn’t receive. You can use line 30 to request a rebated tax credit for what you didn’t receive, and you can subtract that amount from the taxes you owe.
Note that eligibility for all stimulus payments is based on 2019 income. So, if your 2019 income shows more than $75,000 if you are single or $150,000 if you are married and filing jointly, then you won’t be eligible for stimulus payments.
The same rules will apply when it comes time to file your 2021 taxes. A third stimulus payment was authorized earlier this year as part of the American Rescue Plan Act. This money also isn’t part of your taxable income, and if you are eligible and didn’t receive payment, you can claim the Recovery Relief Credit next year when you file your taxes for 2021.
You should have received government stimulus money either as a check, in the form of a debit card, or deposited directly to your bank account by the Department of the Treasury. That extra cash was undoubtedly welcome if you have been struggling to pay your bills during the pandemic. If you do need help with your finances during the COVID-19 crisis, remember that iQ Credit Union is always available to offer a helping hand.
One of the advantages of belonging to a credit union is that you become a member of a collaborative. Our mission is to help members with their financial needs, especially when times are hard. If you have unexpected expenses or are facing unexpected financial challenges because of the pandemic, iQ can help. For example, we are offering members the option to skip loan payments without incurring fees. We also are offering emergency relief loans, mortgage payment deferments, and assistance with government loans.
We are here to help you make the most of your money. If the pandemic has turned your finances upside down, it may be time to revisit your household budget. Our budgeting checklist is a useful tool to help you assess your finances. And remember that the financial professionals at iQ Credit Union are always available to help.