How will coronavirus stimulus checks impact your 2020 taxes?
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Two rounds of stimulus checks (of up to $1,200 and $600) have been sent out and the third round (of up to $1,400) have mostly been sent out. With the tax deadline approaching fast, many people might be concerned about how coronavirus stimulus checks will affect their 2020 taxes. Though the stimulus checks are non-taxable, there are a few tax implications that taxpayers will want to consider.
Effect of coronavirus stimulus checks on 2020 taxes
The IRS has all the details on who received the coronavirus stimulus checks last year. So, the taxpayers who got the stimulus payments are not required to take any action for tax purposes.
On the other hand, you may have to face some inconvenience if you listed the stimulus check as income. It must be noted that stimulus checks are not income, but rather a type of credit.
Nevertheless, if you listed the stimulus checks as income on your tax return, you would have to pay more in taxes. However, the IRS would eventually return the money.
Those who are eligible and haven’t yet gotten the payment from last year, or they got less than what they were eligible for, need to claim their stimulus payment when they file their 2020 tax return. Such people need to file for the Recovery Rebate Credit.
Even those who don’t usually file a tax return or are non-filers, need to fill out Form 1040 or Form 1040-SR to claim the Recovery Rebate Credit. According to the IRS, anyone with income of $72,000 or less can file a tax return for free using the IRS Free File service.
Connection between 2020 tax and stimulus payment
The amount of stimulus checks may not affect your 2020 tax return, but your 2020 tax return will impact your third stimulus check amount. Your third stimulus check amount will be based on your 2020 taxes, if it is available to the IRS, or else on your 2019 taxes.
This means if your income dropped significantly in 2020, you will be eligible for more money in the third round. Even if the IRS bases your third stimulus check on your 2019 taxes and you believe you qualify for more money based on your 2020 income, then also you would be eligible for more money. In this case, however, you will have to wait until 2021 taxes are filed to claim the difference amount.
On the other hand, if you qualify for a lesser amount or no stimulus money at all on the basis of your 2020 tax return but the IRS sent you a third stimulus check on the basis of your 2019 taxes, you won’t be required to pay back the difference to the IRS.
The IRS has also come up with information for those who filed their taxes before the IRS issued the guidance. Those who paid taxes on unemployment insurance would start receiving automatic refunds on those taxes starting next month.