If you are someone who has received or will receive a stimulus check from the federal government, you may be concerned that you will need to pay taxes on those funds in the future. Kiplinger.com addresses that and a few other related tax issues in “Is Your Stimulus Check Taxable?”
Although we are taxed on income, there are no taxes on the stimulus checks because “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.” This is something that a lot of people do not realize.
Those who were unaware that the stimulus checks are actually an advance on a tax credit may also be surprised to see that there is a line related to the stimulus checks on their 2020 federal income tax return. There will be a line that is labeled “Recovery rebate credit” on the 2020 from for federal income tax. Think carefully because “The tax credit is based on what you put down on your 2020 tax return.” There could be a difference between the tax credit and the amount of stimulus money you received if you didn’t file a return on 2018 or 2019. There could also be a difference between the numbers if you had a major change in life circumstances between 2019 and 2020. But don’t worry. If your tax credit is higher than all of the stimulus money you received, you will pay less in taxes. And if you received more stimulus money than you were supposed to, the government will let you hold onto the difference.
There has been a lot of talk on social media about what people should do with their stimulus money. We cannot tell you exactly what to do with it. We can, however, remind you to keep your financial goals in mind and think of thoughtful ways to spend this and any other windfall you receive.