Will You Have to Pay a Lot of Taxes on Your Stimulus Money?

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Since the IRS first distributed the stimulus checks, many people have wondered how they will affect their taxes. Stimulus money is treated as a tax credit, which means it is not considered income and thus does not affect your tax liability.

It’s a different story if you received an overpayment, in which case you may be required to reimburse the overpayment on your taxes. However, the restrictions on this vary. To help you understand what to anticipate, we’ll discuss when you’ll face a higher tax bill as a result of stimulus money and when you won’t.

If your income has increased as a result of the stimulus, you will not be required to repay the funds.

 

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The most frequently expressed concern is that you will be required to repay stimulus funds due to your excessive income. The IRS determined the amount to send based on your most recent tax returns at the time, and all stimulus checks were subject to income limits.

For example, single filers earning more than $80,000 were ineligible for the stimulus check distributed in 2021. However, what if you earned $75,000 in 2020 and $100,000 in 2021? Even if you did not qualify for the stimulus check based on your 2021 income, you would have received one based on your 2020 income.

You are not required to repay any overpayments of this nature. It is a rare occurrence when the IRS permits you to retain the excess funds.

 

When will you receive a stimulus-related tax bill?

In certain circumstances, a stimulus overpayment may result in a higher tax burden. They will not apply to the majority of people, but it is beneficial to be aware of them in case one of them does.

 

You made an error when claiming a Recovery Rebate Credit.

The Recovery Rebate Credit is a tax credit available to individuals who did not receive the full amount of stimulus money. If you remain in debt from the stimulus, you may be eligible for a Recovery Rebate Credit.

If you’re applying for the 2021 Recovery Rebate Credit, double-check everything to avoid receiving an overpayment. If you made a math error when claiming this credit, you almost certainly will receive a notice from the IRS. The IRS has already contacted millions of people who overestimated their credit last year.

 

You received an overpayment of the Child Tax Credit.

The Child Tax Credit provided additional stimulus funds to parents of minor children. Parents can claim the remaining half of the credit on their tax returns. Half of the credit was distributed in monthly instalments from July to December, and the remaining half can be claimed on their tax returns. For 2021, the maximum credit was $3,600 for children under the age of five and $3,000 for children aged six to seventeen.

As with the stimulus checks, the Child Tax Credit had income limits. The IRS is not as forgiving with regard to overpayments as it is with regard to stimulus checks.

The IRS determined the amount to send parents using information from their 2020 tax returns. You may have received an overpayment if anything changed in 2021 that reduced your credit limit. The following are some of the most frequently cited reasons for returning the Child Tax Credit:

Your earnings were higher in 2021 than they were in 2020.

You are claiming credit for the decrease in the number of children. This may occur if you divorced and your ex-spouse claimed your children as dependents on their taxes.
You were not a permanent resident of the United States. To qualify for this credit, your primary residence must have been in the United States for more than half of the year.

 

You have been subjected to an additional stimulation check.

During the third stimulus payout, some consumers received two $1,400 checks rather than one. The IRS advised that the additional check be returned and provided instructions on how to do so. If you deposited both checks but did not return the excess funds, the IRS will almost certainly contact you.

Generally, stimulus funds do not result in a tax bill. If you received only the three payments in 2020 and 2021, you will almost certainly not be required to repay anything. However, you may owe money if you overestimated a tax credit, received an overpayment on the Child Tax Credit, or received a duplicate payment.

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If you believe you will be required to repay any stimulus payments, begin saving money in a savings account to ensure financial preparedness. Because the IRS only allows you a limited amount of time to make tax payments, having cash on hand makes them more accessible.

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