Many questions have arisen about the stimulus checks that were sent out to Americans this past year. Most of the stories we hear are of people not receiving a stimulus check or receiving less than the full amount, despite their income being negatively affected by Covid-19. The reason someone would get less than the full amount of their payment is because eligibility was based on 2019 income, not 2020 income. That said, it is essential to know that stimulus checks are an advanced tax credit from the government on your 2020 tax return.
An advanced tax credit is when the government gives someone a tax credit in the form of cash during the current year instead of waiting until that individual’s tax return is complete. There are two types of tax credits–refundable and non-refundable. The issued stimulus checks are considered refundable tax credits, meaning it can eliminate your tax liability (if the sum is less than the tax credit) and the remaining value of the credit is paid in the form of a tax refund.
Suppose a single person has only received half of their first stimulus check ($600) because their 2019 income was too high. If that person’s income was low enough in 2020 to qualify for the full amount, they will receive the difference of what they were sent during the year and the full amount of the tax credit on their tax return. For example, suppose this same person owed $300 before applying the CARES tax credit. The remaining $600 credit would eliminate their $300 tax liability, and the $300 leftover of the credit will be sent to the taxpayer in the form of a tax refund.
If you did not receive the stimulus check or received less than the full amount but qualify based on your 2020 income, you will receive the stimulus. It will just be in the form of a refundable tax credit.
We understand this past year was frustrating for many. And unfortunately, many affected by the pandemic received little to no stimulus due to their income in 2019. As tax season approaches, please do not hesitate to contact us if you would like to discuss the advanced tax credit or want our team to prepare your 2020 tax return.
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The Twin Rivers team wants to guide you on your journey to financial success. If you have any questions about the topics above or would like to discuss any financial decision you are facing, please do not hesitate to contact our team.