I’m receiving a lot of questions regarding the stimulus payments:
- Are they taxable?
- Do you have to pay it back?
- Does it affect your tax refund/liability for your 2020 return?
Technically, the stimulus payment you have or are about the receive, is an advance payment of a new refundable tax credit for your 2020 Form 1040 tax return (this is the return you will file in 2021).
What is the difference between a refundable and non-refundable tax credit? When you’re eligible to claim a credit that’s refundable and if it’s more than your total tax liability, you will receive payment for the balance of the money. By contrast, a nonrefundable credit can only reduce your federal income tax liability to zero. Any part of the credit that’s left over is not refunded back to you. The IRS gets to keep that part of the money.
The stimulus payment you receive this year is going to be your minimum amount. You don’t have to repay it or pay taxes on it. Let me explain.
You will “True Up” your advance tax credit on your 2020 Form 1040 which you will file in 2021:
- If the stimulus payment you receive is less than the credit you qualify for based on your 2020 Adjusted Gross Income (AGI), then you’ll get the difference back as a refundable tax credit in 2021 after you file your 2020 tax return.
- If the stimulus payment you receive is greater than the credit you qualify for based on your 2020 Adjusted Gross Income (AGI), you have a windfall. You don’t have to pay the cash back to the IRS.
- Your current tax debts will not interfere with the cash amount you have or are about to receive. There are no offsets for outstanding tax debts.
The only exception to this is an offset for past-due child support that is reported to the IRS by a state. In this case, the IRS will take the child support money from the advance tax credit before remitting any money to the taxpayer.
For our clients who qualify for the stimulus payment, we’re working hard to maximize your payment by evaluating your 2018 vs 2019 AGI and not filing your returns if it is detrimental to do so. An example will help explain why.
Example. You filed a 2018 Form 1040 (Single) with AGI of $70,000 and no dependents. Your 2019 Form 1040 (Single), which you did not file yet, has an AGI of $105,000 and no dependents.
If you file your 2019 return now, you will not get a stimulus payment for the advance credit because your AGI would have phased out your entire credit.
But if you don’t file your 2019 return now, you will receive a $1,200 stimulus payment. Fast-forward to your 2020 tax return – say your 2020 Form 1040 has AGI of $110,000. It’s over the threshold. No problem. Under the rules, you keep the $1,200.
With all the programs available with the CARES ACT and stimulus payments, we’re working hard to manage all these in conjunction with strategizing to maximize your tax credits and reduce your tax liabilities.
If you have any questions let us know! We hope everyone is safe and healthy!
The Miller & Associates Team