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Is my stimulus payment taxable?

Posted on March 23, 2021

The short answer is “no,” according to the CPAs at Teipen CPA Group.

The IRS has sent more than 160 million economic impact or stimulus payments since the CARES Act was signed into law on March 27, 2020. This winter, the IRS will send out millions more checks, which will also not be taxed.

According to the IRS:

  • “The stimulus payment is not income so taxpayers do not owe tax on it.
  • The payment will also not reduce a taxpayer’s refund or increase the amount they owe when they file their 2020 or 2021 tax return next year.
  • A payment also will not affect income for purposes of determining eligibility for federal government assistance or benefit programs.”

That’s because, say Teipen Group CPAs, your stimulus payment is technically a tax credit for 2020. A tax deduction is good, but a tax credit is very good. A tax credit reduces your tax bill dollar for dollar. For instance, if you owe $1,500 in federal income taxes and you get a $1,000 tax credit, your tax bill sinks to $500.

But a refundable tax credit is a thing of wonder. In general, a nonrefundable tax credit can reduce your tax bill to zero, but it can’t turn a tax bill into a tax refund. However, a refundable tax credit can. For example, if you owed $1,000 in taxes but had a refundable tax credit of $1,200, you’d get a $200 tax refund check back from the IRS.

Putting it another way

You’re getting what amounts to a refundable tax credit in the form of a stimulus payment. So rather than waiting to receive money from the credit in 2021, when you file your 2020 tax return, you are, in effect, getting an advanced refundable tax credit.

What if you didn’t receive a 2020 stimulus check?

If, for some reason, you didn’t get any stimulus payment last year, but you’re owed one, you can still get it this year when you file your 2020 tax return. You’ll just need to claim the Recovery Rebate Credit on IRS.gov, or ask your CPA for help.

What if it turns out that your stimulus payment was more than you were actually allowed?

It happens. Here’s one way: Suppose the IRS based your stimulus payment on your 2018 or 2019 tax return, when your income was lower, but your income was much higher for 2020? According to Teipen Group CPAs, if someone had income in 2020 that was higher than the tax return to calculate the advance rebate, they will not have to pay the credit back. In other words, any adjustments to a taxpayer’s rebate on 2020 tax returns will be in the taxpayer’s favor.

If you have a complicated 2020 tax situation or need some help figuring out how to prepare your return this year, now is a great time to connect with us for answers.