Two stimulus payments have arrived electronically in most Americans’ bank accounts — or as checks or debit cards in the mail — over the past year as Uncle Sam’s way of helping us get through the coronavirus pandemic.
But now, a lot of people are nervous, wondering whether they are going to owe extra taxes for receiving those payments. We don’t say this often about the IRS, but it actually has some good news for taxpayers.
The federal agency offered the following answer last year after the first round of stimulus payments:
“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 ….”
Nor will the payment affect your income when determining whether you are eligible for federal assistance or benefits.
Sound too good to be true? Well, if you need extra reassurance, you can find it right in this year’s instructions for filling out the Form 1040 tax return. In those instructions, the IRS flatly states that the stimulus payments — the agency prefers the term “economic impact payments” instead — “are not taxable for federal income tax purposes.”
Why isn’t the money taxable? Because in the government’s eyes, it’s a tax credit. The payments most of us received last year were merely advance payments of that credit, known as the recovery rebate credit.
So, the bottom line is that if you received your full stimulus payments last year, you are good to go. You won’t need to claim the credit on your tax form, and you won’t owe the feds an extra penny.
If you didn’t receive your full stimulus payments, you can claim the recovery rebate credit on your 2020 return to get the remainder of stimulus money that has been earmarked for you. For more details on claiming the credit, check out “5 Changes to Your Federal Tax Return Form in 2021.”
How to get help on your taxes
Looking for a little assistance with taxes this year? Several organizations offer low-cost help. And some offer their services for free.
For example, Money Talks News founder Stacy Johnson recently looked at the free tax prep service from Credit Karma, and offered this take:
“Credit Karma tax prep will work in nearly every situation, not just simple ones. You can itemize and even file business returns. There are situations, however, it can’t accommodate, such as foreign tax credits, multiple state returns and certain types of trusts.”
For more on Stacy’s thoughts, check out “How to Get Your Taxes Done Absolutely Free.”
Other services that offer tax help include:
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