Everyone loves a free check. Seeing Uncle Sam drop money into your bank account last year likely stoked your patriotic spirit.
But is there a downside to that unexpected money from the third round of stimulus payments? Specifically, if you are a senior, is it possible that stimulus money could push up your income to the point where you suddenly owe taxes on your Social Security benefits or see those benefits taxed at a higher rate?
Millions of Americans pay no federal income taxes on their Social Security benefits. But millions of others are not so fortunate.
Up to 85% of Social Security benefits can be subject to federal taxes if what is known as your “combined income” is at least $25,000 for singles or $32,000 for married couples filing jointly.
“Combined income” is defined as the sum of:
- Your adjusted gross income (AGI)
- Any nontaxable interest (such as from municipal bonds)
- One-half of your Social Security benefits
So, the question remains: Will that third stimulus payment — which is worth $1,400 per eligible person — push your combined income high enough that Uncle Sam soon will come knocking on your door?
Thankfully, the answer is “no.” Technically, the stimulus payments are not a form of combined income — or any other kind of income.
Instead, they are considered to be advance payments of tax credits. Specifically, the stimulus money is an advance payment of what is known as the recovery rebate credit. So, it has no impact on whether you owe taxes on Social Security benefits.
If you didn’t get a stimulus check from the third round of payments last year and were eligible for one, you can claim the recovery rebate credit when you file your 2021 income tax return, which is due April 18 (or April 19 if you live in Maine or Massachusetts).
There is a line on the 2021 Form 1040 tax return specifically for the recovery rebate credit. So, the tax software or tax professional you use this season likely will ask you exactly how much money you received for the third stimulus payment, in order to determine whether Uncle Sam owes you money for that tax credit.
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