The IRS is delivering stimulus payments to Americans to help offset some of the personal financial strain caused by the coronavirus pandemic.
If you’re getting one, Business Insider tells you: Don’t worry: It doesn’t reduce your tax refund, and you won’t have to pay taxes on it.
The one-time payment — labeled 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 favorite 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 $10,000, but you paid a total of $11,000 through paycheck withholdings, you won’t have an outstanding tax bill when you file your return. Instead, you’ll be getting a $1,000 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 $0. So in this situation, you’d get a $1,000 refund plus the $1,200 stimulus check. (If the credit were nonrefundable, the remaining value wouldn’t come back to you once your tax bill reached $0).
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.
Read more at Business Insider.