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How Will Stimulus Checks Affect My Taxes?

Illustration for article titled How Will Stimulus Checks Affect My Taxes?

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Tax WeekTax WeekWith tax-filing season upon us, Two Cents is donning the green eyeshades and focusing on stories which will help you navigate tax preparation and make the most out of your return.

The last of the $600 stimulus checks were sent out by the IRS, so you should have received yours by now. But what if your checks never arrived? And how can you claim the funds as a tax rebate? Do you have to pay taxes on your stimulus checks? Here’s what you need to know.

I still haven’t received my stimulus payment, how do I get it? 

The IRS cautions that some stray $600 checks might still be in the mail, and this would be particularly true of any mail forwarded to another address. In that case, you might want to hold off on filing your taxes a little bit longer. Otherwise, you’ll want to claim the first $1200 or second $600 check as a rebate in your tax return (that is, if you qualify for them).

To do so, using tax software, you’ll want to look for the “Recovery Rebate Credit” as an option in your return (if you make less than $72,000, use the IRS Free File program at no cost). On the other hand, if you’re filing manually, or want a more detailed explanation of how this rebate is entered on your Form 1040 or Form 1040-SR, check out this detailed walkthrough video.

There’s one caveat to this, however. If you received a notice from the IRS confirming that checks were sent or deposited—either from a letter, or as a status in their online Get My Payment tool—then the IRS recommends that you initiate a Payment Trace. This tool will help you confirm with the IRS that the checks have been lost, stolen, or destroyed. Before you do so, however, follow these guidelines to make sure enough time has passed since the IRS’ status confirmation date:

  • Five days after a direct transfer.
  • Four weeks since the check was mailed to a standard address.
  • Six weeks since the check was mailed to a forwarding address.
  • Nine weeks since the check was mailed to a foreign address.

The IRS will respond with next steps, then they’ll reverse the check, clearing the way for you to claim the rebate as part of your taxes (as checks will not be reissued). Unfortunately, the trace process can take up to eight weeks, and it seems necessary—if you ignore the Payment Trace tool and claim the rebate in your tax return, the IRS might incorrectly rule that you’re ineligible for the rebate.

So, if you’re filing your 2020 tax return before your trace is complete, the IRS recommends not including the payment amount on line 16 or 19 of the Recovery Rebate Credit Worksheet. In that case, it looks like you’ll have to recover the funds in your 2021 tax return. It’s not ideal, to say the least.

Do I have to pay taxes on the stimulus money checks? 

Not federally (Oregon has imposed a tax, however), since the stimulus payments don’t count as income, they’re not taxed, nor will they reduce your tax refund when you file your 2020 tax return this year. The payment also doesn’t count as income for purposes of determining if you’re eligible for federal government assistance or benefit programs.

However, the Internal Revenue Service can repurpose the stimulus funds for unpaid alimony for the first check. The second round of checks can be repurposed for alimony, too, along with unpaid student loans and some federal or state back taxes.

Will the timing of my tax return affect my third stimulus check? 

Oddly, yes, due to a timing issue. Since relief legislation is expected to pass before the end of tax season, not all people will have filed a return for the 2020 tax year. In that case, the IRS will have to cut checks based on your annual gross income from either 2019 or 2020—whichever they have on hand. In that case, if your income was lower in 2020 than it was in 2019, you’ll want to file early to maximize your return. Conversely, if you made less in 2019, you might want to hold off until later in March, when the checks are calculated and sent out. For more information, check out this Lifehacker post.

This story has been updated on Feb. 19, 2021 to reflect that stimulus checks are taxed in Oregon, but not federally.

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