Coronavirus stimulus payments, termed "Economic Impact Payments," are taxable and could reduce your 2020 tax refund.
U.S. President Donald Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law on March 27, 2020, in response to the unprecedented economic disruption caused by the COVID-19 coronavirus pandemic. Among the provisions in this bill is authorization for the federal government to pay each U.S. citizen a one-time check, termed an “economic impact payment.”
In general terms, this is how the payments work:
- Individuals who make up to $75,000 will receive $1,200
- Families who file jointly and make up to $150,000 will receive $2,400
- Families with children receive an extra $500 per qualifying child
- Individuals or households making more than the above will receive reduced payments
- Income is determined from the taxpayer’s 2019 or 2018 tax return, whichever is on file
- Social security recipients who do not pay taxes will also receive a check
While the above metric is fairly straightforward, the CARES Act’s use of the Internal Revenue Service’s (IRS) tax infrastructure to facilitate these payments has caused substantial confusion. That’s because legally the payment is considered a tax credit advanced to the recipient from the (future) 2020 tax return — that is, the return the recipient will file in 2021. This has led some to believe that the payment either needs to be paid back in full in 2020, or that the payment is considered taxable income, or that the payment counts against one’s 2020 tax refund. None of these conclusions, however, is true.
That’s because another provision written into the law dictates that recipients of the economic impact payment will be credited as if they had paid the government back. This makes the payment a non-taxable fund that does not affect future returns. “What’s technically happening is that the person is due a 2020 stimulus rebate ‘credit’ — but that’s reduced by what they received as an advance credit this year, so it exactly cancels out,” Chye-Ching Huang, senior director of economic policy at the non-partisan Center on Budget and Policy Priorities (CBPP), told us via email. “That just prevents duplicate refunds — there’s no practical impact on their 2020 tax refund.”
While it is not possible for changes in your income to require repayment back to the government — i.e., if your 2020 taxable income ends up higher than it was in 2019 or 2018 — it is possible that you could get an additional amount of economic impact money after filing in 2021 if your economic situation worsens, Huang told us:
One benefit of this structure is that it means people can get an extra stimulus credit amount in their 2020 refunds if their income falls in 2020 compared to prior years. Say an individual makes $100,000 in both 2018 and 2019. That’s above the income phase out threshold for the stimulus rebate, so they won’t be sent a stimulus payment immediately. But if this person loses their job in 2020 and so makes $75,000 in 2020, their 2020 income will be below the threshold for the stimulus rebate. So when they file their 2020 tax return in 2021, they will be eligible for a $1,200 stimulus rebate credit against 2020 taxes.
In the opposite situation, when a person’s income in fact rises from 2018/2019 to 2020, they won’t have their refunds reduced in 2020 or face any other claw-back. Say an individual filed a 2018 tax return and made $75,000 and hasn’t filed a 2019 return yet. Then in each of 2019 and 2020 they make $100,000 (above the phase-out for the rebate for an individual). This individual should receive a stimulus payment of $1,200 immediately because the IRS will use their 2018 filing data in absence of a 2019 return. But when they file for 2019 and 2020, they will not be required to pay back the advance refund. Any tax refund they have for 2019 or 2020 won’t be reduced below what it would have been otherwise.
“The most important thing to understand is that the rebate is a bonus amount. The stimulus payment won’t reduce tax refunds for 2020 (when people file in 2021) below what they would have been otherwise,” Huang told us.
Other Economic Impact Payment Claims
Another area of concern is the government’s ability to garnish these stimulus payments should they owe money via student loans or to the IRS. For the most part, according to The New York Times, the IRS has “temporarily suspend[ed] nearly all efforts to garnish tax refunds to repay debts, including those to the I.R.S. itself.” The only possible exception concerns people who are behind on child support payments. “Treasury is explicitly allowed to “intercept” (garnish) the stimulus rebate to offset against child support debt,” Huang told us. “However, it cannot garnish the rebate for other types of federal debt, such as student loans.”
How Do I Get My Money?
For people that have filed tax returns that include direct-deposit information, the IRS says the payments will be made automatically. For those who have not provided this information in their returns, the IRS says that “In the coming weeks, Treasury plans to develop a web-based portal for individuals to provide their banking information to the IRS online, so that individuals can receive payments immediately as opposed to checks in the mail.”
Once you receive that money, however, it is yours to keep. For that reason, claims that the economic impact statement are taxable or affect future tax refunds are false.
Disclosure: The author’s brother is employed by the Center on Budget and Policy Priorities.