Don’t Worry. The $1,200 Stimulus Payment Won’t Cut Into Your Tax Refund Next April

There’s lots of confusion—and unnecessary fear—surrounding the COVID-19 stimulus checks. Understandably so, since these “Recovery Rebates” have been made a part of the always confusing U.S. Tax Code. 

The stimulus checks, which are one-time payments from the government to help consumers weather the economic storm caused by the coronavirus pandemic, are expected to hit bank accounts as early as next week. But the implications of these checks, and how they could affect 2020 taxes, are generating many questions on Twitter. 

“Why are people calling it an advance refund? Does this mean we have to pay it back next year?” 

“Will it lower my tax return?”

“What if I don’t qualify now?”

Don’t panic. Here’s a quick explainer on how the stimulus payment works, and how it relates to your 2020 taxes.

What tax year is the IRS looking at to determine eligibility?

The IRS is using information from 2019 tax returns, or 2018 for those who haven’t filed yet, to determine how much taxpayers will be eligible for with the stimulus checks. The maximum amount is $1,200 for individuals or $2,400 for married couples; an additional $500 will be granted for each qualifying dependent child under 17.

There are income limits to who gets the checks. The higher your adjusted gross income (AGI) is, the less you will receive. If your AGI is at or above $99,000 for a single filer or $198,000 for married couples filing jointly, you’ll get no stimulus check. But if you have one or more minor children who qualify for the $500 check, the phaseout will extend to higher levels. Seniors who rely on Social Security and don’t file tax returns will still be eligible for the stimulus checks.

What is an advance tax credit?

The stimulus checks are technically an advance of a special tax credit for the 2020 tax year. Some tax credits reduce your overall tax bill — the more credits you claim, the less in taxes you will owe. But other tax credits, such as the Earned Income Tax Credit, are refundable—-meaning that if you don’t owe any federal income taxes, the government sends you a check for the credit. In essence, they’re payments from the government delivered through the Internal Revenue Service. 

The stimulus payment is a unique fully refundable tax credit. Even if you don’t owe a penny of tax, you get the full $1,200 per person provided you don’t earn too much (and you’re not a dependent who is 17 years old or over).  Plus, you’re getting this special tax credit in advance—if the IRS has bank account information for you, you will likely see the stimulus money in your checking account in the next few weeks. (If the IRS has to mail you a check, it will take longer.) 

Yes, you will technically claim the tax credit on your 2020 taxes, provided you earn enough in 2020 to need to file a tax return. But there won’t be any double dipping here; assuming you already received the money, the credit will basically wash itself out so you won’t be able to benefit from it twice (once in the form of a payment now, and again later to lower your 2020 tax bill).

So why are people calling it an advance refund? Does that mean the government is taking away my refund next year?

This is the question seeming to cause the most panic on Twitter. The answer is no. Bottom line: your 2020 tax return and any refund you’re due when you file that return in early 2021 will not be affected by the check you’re getting now. 

Assuming you get the full stimulus payment now, you won’t get it again, No double dipping. 

Does the stimulus money count as taxable income?

No. The stimulus checks are nontaxable; they will not be included in your 2020 income. They’re officially addressed in the CARES Act as a “Recovery Rebate for Individuals.” These payments won’t push you up into the next tax bracket for 2020 taxes, if you’re already on the edge. 

“Your taxes aren’t going up next year because of this package — there’s no big income tax changes in the CARES Act,” says Bill Smith, Managing Director for CBIZ MHM’s national tax office, a nationwide financial services firm. 

What if I make more money this year and don’t qualify for what I received—do I have to pay it back?

Another big worry for people. But the good news is that the answer is no. 

Here’s what that could look like: You’re an individual with no children who made $60,000 in 2019, so you qualify for the full $1,200 stimulus check. In 2020, you end up making $85,000, which puts you in the phaseout range, meaning you technically are eligible for a $700 stimulus payment. You do not need to pay back the additional $500.

What if I don’t qualify for the full stimulus based on 2019 income, but my income drops in 2020?  

If your 2019 income was high enough to put you into or past the phaseout range, but then drops significantly in 2020, you will be eligible for any remaining stimulus credit you weren’t originally sent. 

Here’s how that looks: Say you’re an individual with no children who made $85,000 in 2019 and only qualified for a $700 stimulus check. In 2020, your income dropped to $60,000, qualifying you for the full $1,200. You will get the remaining $500 of the stimulus check when you file your 2020 return in early 2021.

The bottom line: No one will end up owing the IRS extra money next year because of the stimulus check they get now.  But some folks who don’t get the full stimulus payment now, may get more later.

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