Over the past year, many people in the US have filed claims to get economic impact payments. However, there is one question that has been popping in everybody’s minds is whether the economic impact payments available to Americans taxable. The forthright answer to this question is that the IRS does not consider Economic Impact Payment as one’s income, and hence nobody owes a tax on it.
When we talk about Economic Impact Payment, assumptions like “Stimulus check adds to your taxes” come around. Such assumptions are completely baseless because stimulus payments do not add to your income and thus do not add to your overall tax obligation. Rather, this Economic Impact Payment, also known as stimulus payment, is a tax credit. A tax credit is a payment received that reduces your taxes instead of increasing them. For instance, if a person in federal income taxes owes $3,000 and gets $1,000 as stimulus payment, the tax bill comes down to $2,000.
Another assumption that many often make is that IRS will reduce the future tax refund when one files his tax return in the coming year. Well, this conjecture is not true. The payment will neither reduce a taxpayer’s refund nor increase the amount they owe when they file their 2020 tax return this year. One more query put forth frequently is whether or not the economic impact payment will affect a person’s eligibility for various government programs. It is clarified that the impact payment sum will not affect the income to determine eligibility for federal government assistance or other government benefit programs.
Who is not eligible to qualify for an Economic Impact Payment?
If you fall in any one of the below-mentioned categories, you are not eligible to claim the Economic Impact Payment (EIP):
Any incarcerated individual or claim for a deceased individual, an estate, or trust are not covered while claiming the Economic Impact Payment.
How do I know about the sums available as my Economic Impact Payments?
For the first Economic Impact Payment, you must have received IRS notice 1444, and for the second Economic Impact Payment, you are supposed to receive Notice 1444-B. If you are eligible to receive the payments, you need to refer to these notices while completing your 2020 tax return. These notices have the necessary information that will help you determine the amounts you need to include while filing your Recovery Rebate Credit Worksheet and while calculating your credit amount through your tax preparation software.
What is the meaning of Recovery Rebate Credit?
The recovery rebate credit is a form of tax credit available against your federal taxes applicable to your 2020 income. It is authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the COVID-related Tax Relief Act. This credit will either enhance your tax refund or decrease the amount of tax liability that you owe. The Recovery Rebate Credit was to be paid in two advance payment rounds during 2020 and early 2021. These two advanced payments of the Recovery Rebate Credit are known as first and second Economic Impact Payments.
People who have received the full amounts of both Economic Impact Payments are not supposed to fill in any additional information about the Recovery Rebate Credit on their 2020 tax returns.
What is the full amount available under the Economic Impact Payment Scheme?
The first phase’s Economic Impact Payment was $1,200 for singles, $2,400 for the married couples filing jointly, and an additional $500 for each qualifying child. Simultaneously, the Economic Impact Payment in the second phase was $600 for singles, $1,200 for the married couples filing jointly, and an additional $600 for every qualifying child.
Suppose you have received the full amount of both the first and second Economic Impact Payment, according to your eligibility. In that case, you do not need to provide complete information regarding the Recovery Rebate Credit on your income tax returns for 2020.
As mentioned earlier, the US individuals who got the full amounts of both the Economic Impact Payments are not obliged to offer the Recovery Rebate Credit details on their 2020 tax federal tax returns. They have already received the full amount of the Recovery Rebate Credit as Economic Impact Payments.
Other general eligibility requirements to claim the Recovery Rebate Credit are as follows:
Even if you are liable to file a tax return as per regular provisions, you shall have to file Forms 1040 or 1040-SR to avail of the Recovery Rebate Credit.
There are some extra guidelines and noticeable points that need to be kept in mind by the taxpayers residing in American Samoa, Guam, Puerto Rico, the US Virgin Islands, and the Northern Mariana Islands:
If you reside in a US territory, you are requested not to complete the Recovery Rebate Credit Worksheet. Please do not enter an amount on line 30 of Form 1040 or Form 1040-SR.
The eligible residents in American Samoa, Guam, Puerto Rico, the US Virgin Islands, and the Northern Mariana Islands can apply for the credit with the respective territory’s tax authorities. Territory residents can direct questions about Economic Impact Payments or the 2020 Recovery Rebate Credit to their respective native territories’ tax authorities.
What if you do not have the relevant notices to claim the Recovery Rebate?
If you do not have notices, you can still extract the necessary information required for claiming a recovery rebate from your online account. You can view the sums offered with your first and second economic impact payments through your online account.
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