By now, you’ve probably received your 2020 stimulus check from Uncle Sam. We’re referring here to the checks that were mailed earlier this year and started arriving in mailboxes and checking accounts back in April. This stimulus check – a “Recovery Rebate” that varied in the amount based on the recipient’s eligibility – was a “gift” from the government to help people get through the COVID-19 pandemic a little more gracefully. Most people gratefully accepted the help.
However, some more suspicious types did their research and discovered the phrase “advance on future tax refunds” somewhere in the U.S. Tax Code, and that’s raised the question: Is this check just an advance on next year’s tax refund?
The short answer is no. These stimulus checks are one-time payments to help U.S. citizens weather the economic impacts of a pandemic. They will not impact 2020 tax returns. That’s great news!
Why the Confusion?
Here’s why people are confused. These stimulus checks fall under the category of special tax credit for the 2020 tax year. Tax credits, in general, are designed to reduce your overall federal tax liability; the more tax credits you qualify for and claim, the less tax you’ll owe. Some tax credits – such as the Earned Income Tax Credit – are refundable. This means that if you don’t owe any federal income taxes, the government returns this money to you in the form of a check.
In the case of the stimulus payment, it is designated as a fully refundable tax credit. But rather than having to wait until you file your 2020 taxes next year to receive this benefit, you get it this year when it’s most useful. This does make it an advanced payment of sorts – but not against your anticipated 2020 tax refund.
The Impact on 2020 Taxes
Next year, when you file your 2020 tax return, you’ll claim the tax credit for the stimulus check, but you won’t receive any money, because you got it this year. It’s essentially a wash and has no impact on your taxes or income for 2020.
Did you catch that? That’s the other good news. Stimulus checks are not considered taxable income. They will not increase your adjusted gross income, nor will they push you into a higher tax bracket.
Adams Accounting Solutions Delivers All the Good News
At Adams Accounting Solutions, there’s nothing we like more than delivering good news to our clients. We’re happy to talk you through the impacts of the stimulus check and answer any other tax questions you have. Just give us a call at 913-888-9100.
