AARP: Will I Owe the IRS Tax on My Stimulus Payment?

[NurseJackie]

This is an older article, but it's "new to me" so maybe it will be new-to-you as well. I thought it was helpful and informative. I hope you get some use from it too. (If so, comment and DU-Rec this post so that others will see it too.)

https://www.aarp.org/money/taxes/info-2020/are-stimulus-checks-taxed.html

Will I Owe the IRS Tax on My Stimulus Payment?
Some worry the money will get reported as income on 2020 tax returns

(snip/snip)

Not your average tax credit

The stimulus payment — or economic impact payment, as the IRS calls it — is technically a tax credit for 2020. But this isn't widely understood. Some people assume that the IRS will add the amount to your income, generating a bigger tax bill, or reduce your future tax refund when you file your tax return next year. Neither is the case, but this bears some explaining.

In the tax world, a tax deduction is a good thing. It reduces your income, which reduces the amount of tax you owe. If you had $50,000 in income and had a $5,000 tax deduction, your deduction would reduce your taxable income by $5,000. If you were in the 12 percent tax bracket, you'd reduce your taxes owed by $600 (12 percent of $5,000).

A tax deduction is good, but a tax credit is very good. A tax credit reduces your tax bill dollar for dollar. If you owe $1,500 in federal income taxes and you get a $1,000 tax credit, your tax bill sinks to $500.

A refundable tax credit is a thing of wonder. A garden-variety tax credit can reduce your tax bill to zero, but it can't turn a tax bill into a tax refund. Refundable tax credits can. For example, if you owed $1,000 in taxes but had a refundable tax credit of $1,200, you'd get a $200 tax refund check from Uncle Sam.

Because you're getting what amounts to a refundable tax credit now in the form of a stimulus payment, rather than waiting to get the money from the credit in 2021 when you actually file your 2020 tax return, you're in effect getting an advanced refundable tax credit.

(snip/snip)

[Iliyah]

1. What about families that usually received large tax refunds . .

and pay very little in taxes. Say a family of 5, 1 adult and four minors. they received $1,200 and $500 each for the 4 minors in the last aid package.

[NurseJackie]

2. I don't know how that would work. It's a good question...

I don't know how that would work. It's a good question that deserves some more research.

[karynnj]

4. That is why they are refundable tax credits.

[PTWB]

11. Yah.

The best way to think of them as a payment that will not impact your taxes.

[Native]

6. The amount doesn't make any difference. Here's another para from the article:

Is my stimulus payment taxable?

The short answer: No. In the somewhat longer words of the IRS: “No, the payment is not income and taxpayers will not owe tax on it. The payment will not reduce a taxpayer's refund or increase the amount they owe when they file their 2020 tax return next year. A payment also will not affect income for purposes of determining eligibility for federal government assistance or benefit programs."

[Sherman A1]

3. Thanks for posting

Very interesting

[Alliepoo]

5. This article is new to me, too.

[SallyHemmings]

7. Thanks for posting!!!!!

[riversedge]

8. helpful. thanks

[Native]

9. Summarized version: Free money. Not considered taxable income in any conceivable way.

[Igel]

10. But at the same time if you don't qualify for the tax credit

and receive it anyway, that's basically added to the "tax due" line of your 1040.

[NurseJackie]

12. Interesting information. I had not heard this before just now.