6 Things You Need to Know About Taxes If You Got a Stimulus Check

The coronavirus pandemic changed how people live their daily lives. For many, it has reduced their income temporarily or, in some cases, permanently. Even those who know how to manage their money felt the financial strain of those early years of the pandemic. Thankfully, the federal government stepped in to help with stimulus checks.

The stimulus payments, also known as economic impact payments, were actually advances on a tax credit, but that’s a bunch of complicated tax speak. What does it really mean? 

Here are six important things you need to know about how stimulus checks and how federal tax returns worked. 

First: how the stimulus check amounts were calculated

First, a refresher on how we ended up with our stimulus checks. Congress authorized two stimulus checks in the calendar year 2020 and one in 2021. The full amount of each was different and broke down as follows:

• The first stimulus check gave eligible taxpayers $1,200 if they filed a tax return as single, head of household, married filing separately, or qualifying widow(er) or provided a couple $2,400 if they filed a tax return as married filing jointly. It added another $500 for each qualifying child.
• The second stimulus check gave eligible taxpayers $600 if they filed a tax return as single, head of household, married filing separately, or qualifying widow(er). Eligible married couples filing jointly received $1,200. The check also included $600 per qualifying child.
• The third stimulus check was worth up to $1,400 for each eligible adult and each qualifying dependent. 

For the checks, your adjusted gross income could limit the amount of your check. Each check was reduced by 5% of your AGI that exceeded the limits for your filing status. These limits were as follows:

• Single filers or married filing separately: $75,000
• Heads of household: $112,500
• Joint filers or qualifying widow(er)s: $150,000

Now, with this in mind, let’s look at six important things to know about the stimulus payments and income tax returns.

The stimulus checks were refundable tax credits

To get the stimulus checks out as quickly as possible, Congress had to do some creative thinking. The stimulus checks that started trickling by direct deposit into bank accounts and as paper checks into our mailboxes in April 2020 weren’t just free money. They were tax credits authorized as part of the stimulus package in the CARES Act. The credit’s formal name is the Recovery Rebate Credit.

Some people may mistakenly think their stimulus check is a tax deduction. Tax credits are different from tax deductions. A tax credit reduces the amount you owe, while a tax deduction decreases your taxable income. Here’s why that matters a lot:

• A tax credit reduces the tax you owe by one dollar for each dollar of the tax credit. If you receive a $2,000 tax credit, it reduces the tax you owe by $2,000.
• A deduction reduces your taxable income by one dollar for each dollar of deduction. That means if you’re in the 12% marginal tax bracket, a $1 tax deduction gives you a 12 cent decreased tax bill.

That’s obviously a big difference. Thankfully, Congress set up the stimulus checks as tax credits that could be fully refundable. By doing this, Congress made it so everyone who qualified for a tax credit could get the money even if they didn’t owe any federal income tax.

Usually, you claim tax credits when you file your tax return. For example, you would normally claim a tax year 2020 tax credit when you file your tax return in early 2021. To speed up the process, Congress decided to give you an advance on that tax credit by mailing out stimulus checks or directly depositing the funds in your bank account.

By engineering the stimulus as a tax credit, Congress avoided a major potential issue. Because they’re tax credits, the stimulus checks don’t get counted as income. That means you don’t have to pay income tax on the amount you received.

Some people worried that they would have received a smaller refund because of the stimulus check payments. The stimulus checks didn't decrease the usual tax refund amount taxpayers received after filing their tax return. 

The stimulus check typically couldn't be garnished

When Congress passed the CARES Act and the Consolidated Appropriations Act, 2021 (the law that created the second stimulus check), it made rules regarding who couldn’t take your stimulus check money. Unfortunately, the laws didn’t cover every potential situation.

The first and second stimulus checks had different rules. For the first check, the Internal Revenue Service couldn’t take the money to pay back taxes. However, the money could be taken to pay back child support owed, and creditors could seize the funds to cover the debts you owed. Some states passed laws to limit creditors, but it didn’t happen across the U.S.

The second stimulus check provided Congress an opportunity to learn from its mistakes. The second check could not be garnished to pay back taxes, child support, or creditors.

Taxpayers may have had to fill out more paperwork

Within 15 days of receiving each of the stimulus check payments, you should have received a letter from the IRS. The first stimulus check letter was Notice 1444. The letter for the second stimulus check was Notice 1444-B, and the letter for the third was Notice 1444-C. These notices showed the amount of the stimulus check.

If you received the maximum possible stimulus check amounts based on the number of qualifying dependents you had, you didn't have to file any extra paperwork with your 2020 or 2021 tax return. Those who received less than the maximum amount possible may have been able to claim a credit if their circumstances in 2020 or 2021 differed from the data used to calculate the stimulus check payment amounts.

To calculate the additional amount of the Recovery Rebate Credit, filers used the “Recovery Rebate Credit Worksheet - Line 30” worksheet. 

Taxpayers didn't have to pay it back if they earned more in 2020

The stimulus check amounts were issued based on previous tax information. To calculate the stimulus check payment amounts, the IRS had to use an AGI amount to determine if you made too much money to qualify for a stimulus check. If you did, your check amount might have been reduced, or you might not have qualified for stimulus money at all.

Whether the IRS used your 2018 or 2019 AGI information depended on each check and when you filed your 2019 tax return. If you received the checks based on 2018 or 2019 tax return information but your 2020 AGI would have disqualified you from receiving stimulus checks, you didn't have to worry about paying the money back.

Taxpayers could become eligible if their 2020 income was lower

Sadly, many people faced enormous financial hardships in 2020. Companies laid off employees temporarily and others permanently shut down operations. If your income was high in 2018 or 2019, it might have limited your stimulus check amounts or eliminated your eligibility for a payment altogether.

Thankfully, people who qualify for the checks based on their 2020 income could still claim their stimulus check payment. 

Taxpayers could claim a baby born in 2020

If you’re like my family and had a child in 2020, the IRS didn’t know about them when they sent out your stimulus checks. As long as your baby was born on or before Dec. 31, 2020, they may have been a qualifying child for the tax credit’s purposes.

Bottom line

Congress designed the stimulus checks to help Americans get money to help offset a small part of the financial strain the COVID-19 pandemic has caused. 

Understanding all the tax rules and how to file taxes and manage your money on your own can feel overwhelming. You don’t have to do it alone. The best tax software options can make filing your tax return much more manageable. All you have to do is answer questions and input your tax information. The software takes care of the rest.