The third and largest stimulus payment arrived electronically in most Americans’ bank accounts — or as checks or debit cards in the mail — last year as Uncle Sam’s way of helping us get through the COVID-19 pandemic. It was worth $1,400 per eligible person.
But now, a lot of people may be wondering whether they are going to owe extra taxes for receiving that payment. We don’t say this often about the IRS, but the federal agency actually has some good news for taxpayers.
The IRS, which refers to stimulus payments as “economic impact payments,” states in this year’s instructions for filling out the Form 1040 tax return:
“Any economic impact payment you received is not taxable for federal income tax purposes …”
Nor would the payment affect your income when determining whether you are eligible for federal assistance or benefits.
Why isn’t the money taxable? Because in the government’s eyes, it’s a tax credit. The payments most of us received last year were merely advance payments of that credit, known as the recovery rebate credit.
So, the bottom line is that if you received your full third stimulus payment last year, you are good to go. You won’t need to claim the credit on your tax form, and you won’t owe the feds an extra penny.
If you didn’t receive your full stimulus payment, you can claim the recovery rebate credit on your 2021 return to get the remainder of the stimulus money that has been earmarked for you.
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.
For more tax news, check out Money Talks News’ latest tax articles.