Over the past year, most Americans either have already received or are in line to receive a total of two COVID-19 stimulus checks. For those who were eligible, the first was worth up to $1,200 per adult and $500 per dependent, and the second was worth up to $600 for each adult and dependent.
If you received these funds, you may be confused about how the payments will affect you when you file your taxes. Specifically, you may be wondering if you are required to pay taxes on the stimulus money and, if so, whether you'd be taxed on the money as ordinary income or capital gains.
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Here's what you need to know
Customarily, you have to pay tax on virtually all of the income you earn, so it's understandable that you'd worry about whether you have to give the IRS a cut of your coronavirus payment -- especially if you received a large sum of money between the two checks.
But the good news is, these COVID-19 stimulus checks weren't income at all. Instead, they were actually a tax credit, but one that the government authorized to be paid out in advance of the time you file your taxes. Since the Treasury gave you the money, you won't have to report it as income when you submit your 2020 returns and you will not be taxed on any part of it.
Since your coronavirus stimulus money isn't counted as income, it not only isn't taxable but it also doesn't affect your eligibility for any other tax savings. For example, many deductions and credits have income limits, such as the Earned Income Tax Credit or deductible IRA contributions. None of the stimulus money will count in determining whether you can claim them.
Does the stimulus check impact your taxes at all?
While you don't have to worry about reporting your stimulus payment as income, your taxes could be affected in one important situation.
If you did not receive your coronavirus stimulus check despite being eligible for it, you have the opportunity to claim it when you file your taxes for 2020.
You may have missed out on your check if you didn't file a tax return in 2018 or 2019 and the IRS didn't have your payment details, and you didn't complete the form for non-filers to claim payments. However, one of the most common reasons people didn't get paid despite being eligible was that the IRS used 2018 and 2019 tax returns to calculate income.
See, the full checks were only available to single tax filers with incomes up to $75,000 and joint filers with incomes up to $150,000 -- after which payments declined at a rate of $5 for each $100 in extra money earned. And the IRS used older tax return data to determine if you could receive a payment and what amount you were eligible for.
Unfortunately, many people saw a decline in their income in 2020. If you were one of them and your earnings fell below these thresholds but were previously above them, you may have become eligible for coronavirus stimulus money but the IRS wouldn't have known it due to working off old information.
The good news is, since the payments were actually tax credits that were just paid in advance, simply submitting a return and showing you qualified will allow you to get your COVID-19 funds. If you need this money, the IRS should begin accepting returns at the end of January, and you'll want to submit your 1040 forms ASAP to get your hands on it as soon as you can.
