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Will You Owe Taxes on Your Coronavirus Check? No. Here’s Why

Taxes

Will You Owe Taxes on Your Coronavirus Check? No. Here’s Why

You could receive your coronavirus stimulus check as early as next week — and when you get that money, it will be 100% tax-free.

Yes, that’s right. That money will be completely yours to spend however you see fit.

Nothing will be deducted for taxes. Not a single cent. You won’t have a lower tax refund next year because of the payments. You also won’t owe more for 2020 because you got a check.

If you’re single and your income is below the $75,000 threshold, you will receive $1,200 in full. If you’re married with income below $150,000, you will receive the entire $2,400. You’ll also receive $500 for each dependent child under age 16.

None of it will count as taxable income.

Confused? You’re not the only one. Here’s how payments will work — and why you don’t have to set aside a portion for next year’s tax season.

It’s a Tax Credit Advance, Not a Tax Refund Advance. Here’s Why That’s Important

The coronavirus relief checks are actually an advance on a 2020 tax credit. They are NOT an advance on your 2020 refund. 

But you may have heard or read incorrect information describing the payments as a refund advance. There was a lot of confusion surrounding this point when the $2.2 trillion CARES Act was signed into law. But hey, that’s bound to happen with any 880-page piece of legislation.

Here’s why the distinction between a tax credit advance vs. a tax refund advance is key:

First of all, let’s define a tax credit, which is what these payments are. A tax credit reduces your tax bill dollar for dollar. Some tax credits, including the stimulus payments, are refundable, which means that even if your tax liability is $0, you get a refund for the entire amount.

A $1,200 refundable tax credit really does put an extra $1,200 in your pocket. 

Normally, you’d have to wait until you filed your return for the year to take advantage of a tax credit. But these payments are meant to provide emergency relief. So the giant relief bill that became law on March 27 directs the IRS to get those tax credits to us pronto. The government knows we can’t afford to wait until early 2021 to get that cash.

Now let’s look at what would happen if these payments were a refund advance. (And let’s all say it together: The relief checks ARE NOT a refund advance.) You wouldn’t be getting an extra $1,200 in your pocket. The government would just be allowing you to hold onto your money a little longer, in which case you would get a lower refund or a higher tax bill when you file for 2020. Fortunately, that’s not what’s going to happen.

To illustrate how the payments will work, let’s take two hypothetical scenarios. We’ll look at how a $1,200 tax credit would apply in a normal year versus how the $1,200 advanced credit will apply in the year of coronavirus.

Scenario #1: You’re a single filer who’s owed a $2,000 refund before a one-time $1,200 tax credit is applied.

Normal tax year: You receive a $3,200 tax refund when your return is processed.

Year of coronavirus: You receive the $1,200 tax credit as early as mid-April. You still receive your $2,000 refund when you file your 2020 taxes.

Scenario #2: You’re a single filer who owes $2,000 in taxes before a one-time $1,200 credit is applied.

Normal tax year: You owe just $800, because the credit reduces your tax bill by $1,200.

Year of coronavirus: You receive the $1,200 tax credit as early as mid-April. You still owe $2,000 when you file your 2020 taxes.

The important thing to note is that in both scenarios, the credit doesn’t change your overall tax liability. It gives you an extra $1,200 regardless — but you get the payment earlier in the coronavirus example.

But Wait! The Credit Could Increase Your Refund

Another confusing point about the stimulus checks: They’re an advance credit on your 2020 taxes. But since the folks at the IRS aren’t psychics, they’ll use our 2018 or 2019 returns to determine our eligibility.

If your 2020 circumstances change, you could qualify based on your 2020 tax return, which you’ll file next year. But in that case, your coronavirus stimulus check will be processed like a regular tax credit. You won’t get an advance on the credit. You’ll get it in the form of a higher refund or a lower tax bill.

The two most likely scenarios where this would apply: 

  1. You earned too much based on your 2018 or 2019 return to qualify, but your 2020 income takes a hit. If your 2020 income falls below the eligibility thresholds for relief payments, you’ll get the credit of up to $1,200 if you’re single or $2,400 if you’re married when you file your 2020 return.
  2. You have a child in 2020. A child born in 2020 will qualify for a $500 credit. But since the IRS is using 2018 or 2019 returns to determine payments, you’ll have to wait until you file your 2020 return to claim your newborn.

But even if you get a coronavirus payment now and your 2020 income skyrockets to the point where you’d be ineligible, you still will not owe taxes. You won’t even have to report the money as taxable income.

There are plenty of things to worry about right now. Paying taxes on your coronavirus relief tax isn’t one of them.

Robin Hartill is a senior editor at Codetic and the voice behind the Dear Penny personal finance advice column.

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