Stimulus checks are landing in the bank accounts of about 80 million taxpayers this week, providing welcome relief to Americans suffering from lost income and jobs. But many are also wondering how the checks — called “Economic Impact Payments” by the IRS — will impact their taxes.
“One question is, ‘Will I need to pay taxes on it’?” says Eric Bronnenkant, head of tax at financial services firm Betterment.
Taxpayers who haven’t yet filed their 2019 returns are also wondering if they should file now, or wait until closer to the delayed July 15 tax filing deadline.
The good news, Bronnenkant and other tax experts say, is that people won’t owe taxes on their stimulus payments. That’s because the payments aren’t considered income — instead, they are prepaid tax credits on your 2020 tax returns, notes Christina Taylor, head of operations at Credit Karma Tax. In other words, Americans won’t need to set aside part of their checks — $1,200 for single filers earning $75,000 or less and $2,400 for joint filers earning $150,000 or less and $500 for children under 17 — to pay the taxman next year.
It’s no wonder that many people are confused about how the stimulus checks will affect their taxes, given the changing terminology since the $2 trillion stimulus package was signed late last month. The bill called them “recovery rebates for individuals,” a vague term which then morphed into Economic Impact Payments, which also doesn’t provide much information.
“I have no doubt they could have made the entire process simpler, but that would take the fun out of it and put me out of job,” Bronnenkant jokes.
Do I have to pay back stimulus?
Because the Economic Impact Payments are advances on credits for your 2020 taxes, you’ll reconcile that when you file next year, Taylor notes.
Right now, the IRS is basing your stimulus checks on either your 2019 or 2018 tax returns, depending on the most recent return you’ve filed. Because the tax filing deadline was delayed until July 15 rather than the traditional April 15 deadline, some Americans haven’t yet filed their 2019 returns. In that case, the IRS will look at your 2018 returns to determine your payment.
But what happens when the IRS reconciles that Economic Impact Payment with your 2020 income next year, especially if your income changes? The upside is that consumers whose earnings increase beyond the $75,000 and $150,000 thresholds won’t need to pay back their stimulus checks, tax experts say.
And it’s possible that consumers could see bigger tax refunds, such as if their income drops in 2020. That’s a situation likely for many taxpayers, given that a record 22 million taxpayers have filed for unemployment in the past month.
“It won’t negatively impact your refund, but it could positively impact your refund,” Bronnenkant says.
Are you having a baby in 2020?
And if you have a child in 2020 and claim them on your 2020 tax return (but hadn’t on your 2019 return since they weren’t born yet), you’ll also get an additional $500 next year.
“If you didn’t qualify for the stimulus payment based on your 2019 income, but you do qualify based on the income you make in 2020, you’ll be able to claim the stimulus payment as a credit on your 2020 tax return,” Taylor says.
File taxes now, or later?
Some taxpayers are wondering if it’s best to file their 2019 returns now, or wait until closer to the July 15 tax deadline, Bronnenkant says.
If you expect not only a tax refund but a stimulus check, it’s probably best to file that tax return as soon as possible, Taylor says. “Get that money in the bank,” she adds.
But if your 2019 income tops the $75,000 or $150,000 threshold for single and joint filers — with the stimulus payment amounts reduced by $5 for every $100 above those amounts until they phase out at incomes exceeding $99,000 for individual filers and $198,000 for joint filers with no children — you may want to hold off until closer to July 15.
“Let’s say in 2018 as a single person your income was $50,000, and in 2019 your income was $100,000, and let’s say you haven’t filed your 2019 tax return yet,” Bronnenkant says. “You don’t want to file that until after you get your $1,200,” adding that “some people are kicking themselves now that they filed their 2019 return too soon.”
Via – USATODAY