The start of tax season in 2021 marks the beginning of one of the most complex tax filing seasons in most tax filers’ lifetimes. While we hope your income and finances went unaffected in 2020, we know that wasn’t the reality for millions. A host of unexpected variables impacted people’s finances last year, from loss of work and first-time unemployment recipients to stimulus payments.
With multiple complex financial situations taking foot, the tax filing landscape for many has also grown unfamiliar. And many people have found themselves facing down the prospect of filing taxes that look totally foreign to them compared to previous years.
Probably the most persistent question: “Do I have to pay taxes on stimulus payments?”
Sadly, until very recently, you were more likely to get answers to questions like this from folks like us than you were to get answers from the government, as guidance and rollout of some of these programs hasn’t always been phenomenal. But fortunately, the IRS has officially sent out some clarification this month.
So we’ll walk you through what the economic impact payments mean for your taxes. We’ll also cover a few considerations you should make when filing taxes for the 2020 tax year.
You don’t need to pay taxes on your stimulus payments. The IRS doesn’t consider them as taxable income.
This month, the IRS send out guidance specifically surrounding the second economic impact payment from late in 2020. While the total was lower than the first payment—$600 for individual filers—the payment qualifies in the same way as the first one did. So we’ll walk you through some of the language from the IRS letter, which applies to both economic payments.
Both of 2020’s economic impact payments based off your 2019 federal income tax return. While that factored in less heavily to the first payment, the second payment came with certain phaseouts at various income levels. Here’s what the IRS says about it:
Your EIP2 (Second Economic Impact Payment) is based on information from your 2019 federal income tax return or information you provided… This information includes your filing status, the number of qualifying children, and your adjusted gross income.
As we mentioned earlier, the IRS doesn’t consider your stimulus payment as income. So you won’t need to include it on your taxes. You also don’t need to list it as a tax deduction or tax credit. And it typically won’t impact any federal benefits you might receive, like unemployment or disability. The IRS says the following on this:
Your EIP2 isn’t considered taxable income, and you shouldn’t report it as income on your 2020 federal income tax return. If you receive federal benefits or federally financed benefits, those benefits generally won’t be affected by any EIP2 you receive.
Your stimulus payment goes to your personal financial relief, and the IRS won’t get in the way of that. While some significant tax debts may result in the garnishment of your wages, that doesn’t apply to your stimulus payments. On this, the IRS says the following:
Your EIP2 hasn’t been reduced for past due child support or any other federal or state debts.
After a tough year, we can take some solace in the fact that your stimulus payment will remain yours—and you won’t need to pay taxes on it this tax season. However, a number of rude surprises have befallen many tax filers that they simply didn’t expect.
For example, many first-time unemployment filers have discovered that they now owe hundreds—or thousands—in taxes on their unemployment insurance. This reopens the financial wound of a job loss and puts them in a dire position: Pay now or start the spiral of tax debt.
If you find yourself facing an uncertain tax scenario, don’t risk it. Making mistakes on your taxes this year, or leaving yourself to face your tax debt alone, can cause you serious problems for years to come.
Instead, get expert help from a professional tax team who can offer you the guidance you need—and answers to your questions. Together, we can help ensure that 2020 stays in the past, where it belongs. And that 2021 and onward offer a financial step in the right direction.
Concerned about filing taxes in 2021? Or worried that the IRS will discover you owe them money? We can help. Just give us a toll-free call today at 1-888-978-6747—or send us a message through our free live chat.
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