Since the IRS began issuing stimulus cheques, many taxpayers have been wondering how they will effect their taxes. Stimulus money is technically a tax credit, which means it does not qualify as income and hence does not often increase your tax liability.
If you received an overpayment, however, the situation is different, and you may be required to reimburse it on your taxes. However, the rules on this subject vary. To help you prepare, we’re going to discuss when you will and will not face a larger tax burden as a result of stimulus money.
If your income grew, you will not be required to repay stimulus funds.
Probably the most common concern is that you will be required to repay stimulus funds due to your excessive income. The stimulus checks were all subject to income limits, which the IRS determined based on your most recent tax filings at the time.
For example, single filers earning at least $80,000 were ineligible to receive the 2021 stimulus cheque. What if, however, you earned $75,000 in 2020 and $100,000 in 2021? You would have gotten the stimulus payment based on your 2020 income, even though your 2021 income would have disqualified you.
You are not compelled to repay such overpayments. It is a rare circumstance in which the IRS will allow you to keep the excess funds.
When will you face a tax charge on stimulus funds?
Certain circumstances may result in a bigger tax obligation as a result of a stimulus overpayment. They do not apply to the majority of people, but it is prudent to be aware of them in case any of them do.
You made an error in your claim for a Recovery Rebate Credit.
The Recovery Rebate Credit is a tax credit offered to persons who did not receive the full amount of stimulus money. If you are still owed stimulus funds, you may be eligible to receive a Recovery Rebate Credit.
If you make a math error when claiming this credit, the IRS will almost certainly send you a letter. The IRS has already contacted millions of consumers who calculated their credit incorrectly last year. If you’re applying for the 2021 Recovery Rebate Credit, double-check everything to avoid receiving an overpayment.
You were overpaid for a Child Tax Credit.
The Child Tax Credit enabled parents of minors to access additional stimulus funds. For 2021, the maximum credit was $3,600 for children aged 5 or younger and $3,000 for children aged 6 to 17. From July to December, half of the credit was distributed in monthly instalments, and parents can claim the remaining half on their tax returns.
The Child Tax Credit, like the stimulus cheques, had income limits. Unlike stimulus cheques, the IRS is not as flexible with regard to overpayments.
The IRS calculated the amount to send parents based on information from 2020 tax returns. If something changed in 2021 that reduced your credit limit, you may have gotten an overcharge. The following are some of the most typical reasons you may be required to repay the Child Tax Credit:
In 2021, your income was higher than in 2020.
You are claiming credit for the reduction in childbirth. This may occur if your ex-spouse divorced and claimed your children as dependents on their taxes.
Your primary residence was not located in the United States. To qualify for this credit, your primary residence must have been in the United States for at least half of the year.
You were subjected to an additional stimulus check.
Some recipients of the third wave of stimulus funding received two $1,400 checks rather than one. The IRS recommended returning the additional check and provided directions on how to proceed. If you deposited both checks and have not yet repaid the excess amount, the IRS is likely to approach you.
In the majority of circumstances, stimulus money will not result in a tax bill. If you only received the three payments in 2020 and 2021, there is really little reason why you should be required to repay money. You may owe money, though, if you overpaid on a tax credit, received an overpayment on the Child Tax Credit, or received a double payment.
If you believe you may be required to repay any stimulus payments, begin accumulating money in a savings account now to ensure financial preparedness. The IRS allows only a limited length of time to pay tax payments, and having the money saved significantly simplifies the process.