Don't worry — your stimulus check won't lower your tax refund

Hispanolistic/E+/GettyEven though the stimulus payment may feel and look like a tax refund, it’s not
  • The US government is sending out cash payments, which people are calling stimulus checks, as the coronavirus pandemic continues to cause financial strain.
  • Technically the payment is a refundable tax credit that qualifying Americans can apply to their 2020 tax bill, but the government is handing it out early.
  • A tax credit reduces your tax bill on a dollar-for-dollar basis. Refundable credits, like the stimulus payment, mean you can get cash back even if you don’t owe anything.
  • Don’t worry: The one-time payment won’t reduce your tax refund. If you’re owed one, and you file your tax return, you’ll still get the full refund as a separate payment.
  • Read more personal finance coverage.

The IRS will deliver stimulus payments to Americans starting around April 9 to help offset some of the personal financial strain caused by the coronavirus pandemic.

If you’re getting one, don’t worry: It doesn’t reduce your tax refund, and you won’t have to pay taxes on it.

The one-time payment – labelled by the government’s relief bill as a “recovery rebate” and called an “economic impact payment” by the IRS – is technically a refundable tax credit meant to offset your 2020 federal income taxes. That’s the return taxpayers will file next spring for income earned this year.

You usually can’t claim a tax credit until you file your taxes, since you don’t know what you owe until the year is over. Because of the severity of this national crisis, the government is giving qualifying taxpayers their credits early in the form of a cash payment.

Even though the stimulus payment may feel and look like a tax refund, it’s not. You’ll still get your full tax refund next year (and this year too, for that matter) as long as you file a tax return.

The difference between a stimulus check and a tax refund

Let’s define two important terms:

A tax refund means you paid too much in taxes throughout the year, whether through estimated quarterly payments or taxes withheld from your employer. When you get a tax refund, the government is returning what is rightfully yours.

A tax credit reduces your tax bill on a dollar-for-dollar basis. It’s like having store credit at your favourite clothing shop – when you apply it to your total bill, it reduces what you owe. Some tax credits, like the coronavirus recovery rebate, are refundable. That means you’ll get the money back in cash even if you don’t have enough tax liability to offset it.

Importantly, a refundable tax credit will never reduce the size of your refund; it will only increase it. By applying a credit, you’re just lowering the amount of taxes you owe. The amount you paid in taxes throughout the year hasn’t changed; the IRS will still need to settle the score.

For example, if your annual tax liability – the amount you owe based on your earnings – is $US10,000, but you paid a total of $US11,000 through paycheck withholdings, you won’t have an outstanding tax bill when you file your return. Instead, you’ll be getting a $US1,000 refund. If you’re entitled to a refundable tax credit, like the coronavirus rebate, you’ll get the full amount of the credit even though your tax bill is $US0. So in this situation, you’d get a $US1,000 refund plus the $US1,200 stimulus check. (If the credit were nonrefundable, the remaining value wouldn’t come back to you once your tax bill reached $US0).

Typically, you can have your refund seized if you owe back taxes, but that won’t happen to your stimulus check. Even people with tax debt should be getting a stimulus payment if they’re under the income thresholds, have a Social Security number, and aren’t claimed as a dependent. The only people who could get their payment reduced because of debt are parents with outstanding child support.

How is my stimulus check calculated?

Ideally, the US government would make the stimulus payments based on 2020 income figures, since millions of people who were otherwise gainfully employed last year are now out of a job because of coronavirus-containment measures and could need the cash.

But the IRS is instead using the adjusted gross income listed on the most recent tax return you filed, either 2019’s or 2018’s, to determine the size of your payment. Americans who haven’t had to file a tax return in recent years but get Social Security payments for retirement will also be paid the maximum amount – $US1,200 – via direct deposit or the home address provided on their statements.

Americans who generally aren’t required to file tax returns because they don’t earn enough money will get stimulus payments as well. TurboTax created a free online portal to help those people send their direct-deposit information to the IRS.

Again, since these payments are based on previous income, you might receive more or less money than intended on a current needs basis. While it won’t help you today, experts say the IRS should allow taxpayers who didn’t receive their payment to claim the credit on next year’s tax return if they can show that their 2020 income qualifies.

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