Everyone loves a free check. Seeing Uncle Sam suddenly drop money into your savings account is likely to stoke your patriotic spirit.
But is there a downside to all that unexpected money? Specifically, if you are a senior, is it possible that the stimulus money could push up your income to the point where you suddenly owe taxes on your Social Security benefits or see those benefits taxed at a higher rate?
Millions of Americans pay no federal income taxes on their Social Security benefits. But millions of others are not so fortunate. Up to 85% of Social Security benefits can be subject to federal taxes if what is known as your “combined income” is at least $ 25,000 for singles or $ 32,000 for married couples filing jointly.
“Combined income” is defined as the sum of:
- Your adjusted gross income
- Any nontaxable interest
- One-half of your Social Security benefits
We explain the term — and other important words — in “9 Social Security Terms Everyone Should Know.”
So, the question remains: Will those stimulus payments push your combined income high enough that Uncle Sam soon will come knocking on your door?
Thankfully, the answer is “no.” Technically, the stimulus payments are not a form of combined income — or any other kind of income.
Instead, they are considered to be advance payments of tax credits. Specifically, the stimulus money is an advance payment of what is known as a recovery rebate credit. So, they have no impact on whether you pay taxes on Social Security.
If you don’t get a stimulus check, you instead can claim the recovery rebate credit when you file your annual taxes, as we detail in “5 Changes to Your Federal Tax Return Form in 2021.”
So, enjoy spending your stimulus money with a worry-free mind. Or better yet, use the check to build a stronger foundation for the rest of your retirement.
For more on the latest round of stimulus checks — and other changes that might be coming your way courtesy of the federal government — check out “7 Hidden Tax Credits in Democrats’ Latest Relief Bill.”
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