Knowing what is and isn’t taxable is crucial to getting your tax return right the first time. But this year, there’s a new question that many tax filers want answering, and that is ‘are stimulus checks taxable?’
By now, most taxpayers will have received three stimulus payments over the course of the past year, with the main intention of supporting the pandemic-affected incomes of Americans. And that’s where the doubts can creep in when sitting down with your tax software (opens in new tab) - your household has had these financial boosts, but should the money received from stimulus checks be included when filing your tax return?
Are stimulus checks taxable?
In short, the answer for those wondering is no, stimulus checks are not taxable. As the IRS succinctly explains (opens in new tab) on its website, a stimulus payment “is not income and taxpayers will not owe tax on it.”
This means that the funds you’ve received from stimulus checks are “not includible in your gross income. Therefore, you will not include the payment in your taxable income on your federal income tax return or pay income tax on your payment.”
The agency also confirms that stimulus checks by themselves should not reduce your tax refund or see any increase in the amount that you might owe when you file your 2020 tax return (opens in new tab).
Importantly for some, neither the previous two stimulus payments, nor the third stimulus check (opens in new tab) which is being disbursed now, affect the eligibility for federal government assistance or benefit programs either.
Why aren’t stimulus checks taxable?
Quite simply, stimulus checks are not taxable because they’re effectively an advance on a form of tax credit, and tax credits cannot be taxed as income.
However, when it comes to actually filing your taxes, taking a look back at what you’ve received through stimulus payments may be time well spent. That’s because if you’re yet to receive either of the first two relief payments, or you believe you were underpaid, the shortfall that you’re owed can be claimed via the Recovery Rebate Credit (opens in new tab) when you file your 2020 tax return. If you don’t normally file taxes, you can still claim the Rebate using the Free File (opens in new tab) program on the IRS site.
Doing this could be particularly important if you haven’t filed a return for 2018 or 2019, or your circumstances have changed in the past year, perhaps through job loss, having a new baby, or you’ve recently graduated from college. All of these things could mean you’re owed more, but the IRS will only know once you’ve filed your 2020 return, which you now have until May 17 to complete (opens in new tab). If you’re due additional stimulus money, this could be added to your tax refund, or alternatively used by the IRS to cover any taxes that you might owe.
You’ll find the amount you received under your first and second stimulus payments on Notice 1444 and Notice 1444-B respectively, which will have been mailed to you by the IRS.
What if your stimulus payment was too much?
If it turns out that, based on your 2020 tax return, the stimulus payments you’ve been paid are more than what you should have received, the good news is that you don’t have to pay the extra money back.
For example, you may have received $500 for a child who, based on your 2018 or 2019 return, met the eligibility criteria for a child payment. However, if that child turned 17 last year and no longer qualifies, the $500 is still yours.
Other tax filing reminders
How to treat stimulus checks may have created some tax filing confusion, but it’s far from the only thing that taxpayers need to bear in mind (opens in new tab) when completing their tax returns.
In particular, remote workers need to be aware of the rules surrounding home office deductions (opens in new tab), which might not run exactly as you’d think. More positively, the IRS has just confirmed that face masks, sanitizers and other expenditure on similar COVID-19 protective equipment is tax deductible (opens in new tab).