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Stimulus checks and 2021 Taxes

Stimulus checks and 2021 Taxes

Will my stimulus checks have an impact on my taxes for 2021?

Americans from New York to California and everywhere in between are rightfully wondering if the stimulus checks they cashed in the prior year will affect their 2021 taxes. Indeed, stimulus payments issued in response to the ongoing COVID-19 pandemic will impact the average person’s taxes for 2021.

Let’s take a quick look at how those stimulus checks might affect the taxes you file this spring.

Addressing common concerns

Will the EIP decrease my tax refund?

  • No. Receiving the Economic Impact Payment (EIP) does not decrease your tax refund. Tax refund money is transmitted to taxpayers who overpaid taxes throughout the past year. The EIP stimulus check is completely distinct, meaning it is a separate payment independent from a taxpayer’s tax obligations.

Is the EIP an advance on my refund?

  • No. The stimulus payment does not constitute an advance on a taxpayer’s tax refund. Rather, the EIP is an advance on the federal tax credit for the year. The logic in distributing such payments prior to the tax deadline was to stimulate the economy amid the ongoing pandemic.

Do I need to claim my EIP on my taxes?

  • Yes. Many taxpayers also wonder if they must report the third stimulus payment on their end-of-year tax return, and they will need to record the payment on the tax return. Hold onto the receipt the IRS transmitted to you in the weeks following the third stimulus payment so you can enter that information when preparing your taxes this spring. Thankfully, stimulus checks are not taxable income. Rather, the EIPs are viewed as similar to advanced tax credits, meaning no income tax is owed for cashing them.

Do stimulus payments need to be paid back?

  • No. There is no need to pay back stimulus payments when filing taxes in the upcoming spring. This payment was issued based on your income level in the preceding year, meaning it was strategically paid out to those most likely to spend it and consequently stimulate the economy.

What about potential write-offs for COVID-related deductions?

There are no special COVID-related write-offs this tax season unless you are self-employed. The Tax Cut and Jobs Act suspended tax write-offs for home office deductions. This suspension will last all the way through 2025. However, there is the potential for the law to be amended in the year ahead in the event that Congress provides additional coronavirus-related tax relief.


The Child Tax Credit

The Child Tax Credit is in the same category as the Earned Income Tax Credit (EITC), as both were created to help working families, allowing them to claim over $1,500, depending on the number of qualifying children. This claim is made through a refundable credit. However, every taxpayer should be aware that the stimulus bill will increase the amount of money families are allowed to claim, raising the maximum to $3,600 for each child younger than six years old.

  • The new stimulus bill also increases the amount of money a family can claim for kids ages six and older, increasing it all the way to $3,000. The funds from this credit will be divided 50/50, with half being transmitted through a tax refund and the other half paid out in sequential months starting in July and extending to December.

  • If you are a parent, it is in your financial interest to maximize the tax credits you are eligible for. You can find out more about your eligibility for such credits by using the IRS tax credit calculator for parents available on the IRS website.

Click the link above, and you will be able to accurately gauge whether your child or other dependent qualifies for this helpful tax credit. However, note that claiming the credit might lead to additional requests for information that can potentially delay the transmission of your refund.


Didn’t receive your stimulus payments? Here’s how to proceed

If you didn’t receive stimulus checks in 2021 that you were rightfully owed based on your income in the preceding year, don’t fret. If you were eligible for those checks, you can recoup the funds by claiming the missing money on your tax return. This claim is made in the form of a recovery rebate credit. The ensuing credit decreases the taxes you owe for the year or increases your end-of-year refund all the more.

Sometimes referred to as a “catch-up” economic stimulus payment, this recovery rebate is obtained through Form 1040-SR or Form 1040. Reference the IRS Recovery Rebate Credit Worksheet  from the IRS website to determine if you are eligible for this catch-up compensation.

However, those who owe back taxes or have delinquent tax debt to the federal or state government might not be provided with the entirety of the missing stimulus payment(s) or any of the money at all. Furthermore, there is also the potential for creditors and other financial institutions that qualify as unpaid creditors for outstanding debts to pursue these yet-to-be-paid funds, potentially intercepting economic stimulus payments before they reach your bank account.


Do stimulus checks affect taxation in the context of federal benefits?

There is a common misconception that receiving stimulus checks affects other benefits in the context of year-end taxes.

Will these checks affect other benefits?

No. If you received unemployment benefits, Social Security benefits, or any other federal benefits in 2021, you can rest easy knowing the stimulus checks you cashed will not affect those benefits or change your income tax bracket.

Do other benefits keep me from receiving the stimulus?

No. Receiving such federal benefits does not preclude cashing the stimulus checks. Nor do the stimulus checks push you into a higher tax bracket. If you receive Social Security retirement or disability benefits, or even Railroad Retirement income and are not required to file a tax return, there is no need to take any specific action when tax season arrives, since the IRS used Form RRB-1099 or Form SSA-1099 to issue the stimulus payments.

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