What to Know About Stimulus Payments and Your Taxes

·5 min read

As the COVID-19 pandemic swept across the country and closed businesses in its wake, the government issued multiple rounds of stimulus relief and other payments designed to help American households weather the storm.

In 2021, that relief included a third round of economic impact payments, advanced payments on the child tax credit and enhanced unemployment benefits. As we head into the tax filing season, you may now be wondering if and how those payments will affect your tax bill.

Keep reading for answers to common questions.

[Read: How to Get the Biggest Tax Refund This Year.]

Do I Need to Pay Taxes on Stimulus Payments?

The good news is that stimulus money received last year won't increase tax bills this spring.

"Don't report stimulus checks as income," says Jeremiah Barlow, head of family wealth services for financial firm Mercer Advisors. If you do, you could end up paying more taxes unnecessarily. "Some people might enter it as income, and the IRS is unlikely to catch that for you," according to Barlow.

However, you don't need to take your tax professional's word for it. The IRS instructions for this year's 1040 form state, in part: "Any economic impact payments you received are not taxable for federal income tax purposes."

What Is the Recovery Rebate Credit?

After debuting last year, the recovery rebate credit is back for 2021. However, if you received a stimulus payment last year, you probably won't qualify for it. The credit is only available to those who should have received an economic impact payment but didn't for some reason.

"There was a little bit of a timing difference," explains Eugene Pupkov, tax principal in the East Hanover, New Jersey, office of accounting firm Friedman LLP. To issue stimulus payments, the IRS had to use 2019 or 2020 tax return data to determine a taxpayer's eligibility. However, that means someone who didn't file a return in those years or who saw a drop in their income might have missed out on a payment.

Those who didn't receive a payment last year or who had a change in their situation, such as the addition of a child, can complete a worksheet to determine whether they are eligible to claim the credit on their 2021 tax return.

[Read: What Tax Credits Do I Qualify For?]

How Do I Know if I Received an Economic Impact Payment?

If you aren't sure whether you received a 2021 stimulus payment or how much it was, the IRS is making it easy to find out.

The government is mailing notifications to all taxpayers who received economic impact payments or advance child tax credit payments, according to Paul Camhi, vice president and senior financial advisor with the Wealth Alliance in Melville, New York. "That will show how much (people) received in 2021," he says.

Will I Have to Return a Stimulus Payment if I Earned More in 2021?

For last year's payment, only single taxpayers with adjusted gross incomes at or below $75,000 and married couples filing jointly with adjusted gross incomes at or below $150,000 were eligible for the full amount. To determine eligibility, the government used previous years' tax return data.

Since the stimulus payments were actually an advance on the recovery rebate credit, some people may worry they will need to return the money if their 2021 income is above the eligibility limits. Fortunately, that shouldn't be a concern.

According to a fact sheet from the IRS that was last updated on Dec. 31, 2021, "... the law doesn't require you to pay back any excess payments based on the information reported on your 2020 tax returns."

What Happens if My Dependents Changed in 2021?

If you added a new child to your family in 2021, you may be eligible for a recovery rebate credit for that child. On the other hand, if you have an adult child that you will no longer be claiming as a dependent this year, it's possible that child may be eligible for their own credit when filing 2021 tax forms.

Divorced parents who claim children on alternate years may also benefit from a recovery rebate credit. For instance, if one parent claimed a child in 2020 and received a stimulus payment last year, the second parent may be able to claim the child on their 2021 return and receive a credit this year. Check with a tax professional to be sure.

[READ: Your Guide to 2021 Tax Deductions.]

Could Other Economic Relief Affect My 2021 Tax Return?

It's possible. Here are some of the ways that 2021 government relief programs could affect your return this spring:

Enhanced unemployment benefits: Many unemployed workers continued to receive enhanced federal unemployment benefits through the spring and summer of 2021. While the government waived taxes on up to $10,200 of benefits received in 2020 by income-eligible people, that perk didn't extend into 2021.

"It's especially important for those who withheld too little," Barlow says. They could be hit with an unexpected tax bill when filing their return this spring.

Advance child tax credit payments: During the second half of 2021, the IRS sent advance payments to families expected to be eligible for the child tax credit. These payments were calculated to equal half a family's total credit.

"This one is a bit of good news, bad news," Camhi says. Getting the payments in advance was helpful to many families, but "the bad news is that some people could see a smaller credit (on their tax return)." And a smaller credit could result in a smaller refund or -- in some cases -- even result in taxes being owed.

Suspended student loan payments: The government suspended payments on eligible federal student loans during 2021 and instituted a 0% interest rate. While paying no interest is great, it could have tax consequences.

"That will affect people who normally deduct interest," Barlow says. It means the loss of an up to $2,500 deduction for some people.

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