Stimulus money may be heading your way -- unless, of course, you're on the IRS naughty list.
With all the back-and-forth debates over stimulus, it can be a bit difficult to pinpoint if you qualify to receive extra money from the government. Understanding your eligibility, though, can help you plan ahead and make better financial decisions with the money you have now.
If you find yourself on the edge of your seat wondering if you're in line for the next round of checks or if you're eligible for a rebate credit for payments you didn't receive yet -- especially if you haven't paid all your taxes -- here are a few things you should know about stimulus checks so you won't be surprised later.
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It's a tax-free source of income
Receiving stimulus payments may be one of the few times when you can receive money and not have to report it on your tax return as income. Even unemployment benefits are considered taxable income. So, if you qualify for stimulus money, you've hit the jackpot on an extra source of income that doesn't have to be included in your gross income calculation when you file your tax returns. Enjoy your tax-free boost from the government.
That's a huge reason why everyone wants to get their hands on this extra money. You are not required to share any of your proceeds with the IRS.
But receiving this money gets a bit tricky. In many cases, the IRS used 2018 tax returns to calculate eligibility for the first round of stimulus checks. If a taxpayer had already filed 2019 tax returns before the first round of checks were distributed last year, the IRS used 2019 income to calculate eligibility and payment amount.
What happens when you owe taxes?
Typically, any refund that you receive on your tax return is snatched away to pay down federal and state debts. Let's say you have outstanding student loans, state taxes, or child support payments that you've tried to ignore. The IRS will garnish any tax refund amounts you receive to offset those past-due tax bills.
But it doesn't quite work this way with stimulus. Because stimulus money is designed to boost the economy and give a lifeline to those in need, the IRS will still send you a check even if you have outstanding debts. You won't be denied a stimulus check just because you're behind on your tax bills. If you choose to, you can use always use your stimulus check to pay down tax debts. That makes sense if your basic needs are already taken care of.
An exception to the rule
According to the CARES Act, there was only one thing that could stand between you and your stimulus check: Past-due child support payments. Individuals who owed child support payments had their stimulus money confiscated to pay arrears during the first round of stimulus checks.
However, if you owed child support payments when the second round of payments was sent, you were still eligible to receive your stimulus payments because of the new laws that were passed.
The Recovery Rebate Credit may affect you
If you didn't receive all the stimulus money you were entitled to receive in 2020, you may be eligible to claim the Recovery Rebate Credit when you file your tax returns. This gives you access to the stimulus money that you missed out on last year.
But there's one issue that can come up during tax season: Qualifying for the full refund from the Recovery Rebate Credit if you owe taxes. Although the COVID-relief laws gave millions of people access to stimulus checks even if they had outstanding tax debts, it doesn't work that way with this tax credit. Let's say you get a $1,200 refund on your 2020 tax return because of the Recovery Rebate Credit. The IRS can garnish this money to pay outstanding debts.
This is a known issue. The IRS and Congress could provide some relief in the next bill. Stay tuned to see what's in store for a third stimulus payment and Recovery Rebate Credit tax relief.
