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Are Stimulus Payments Taxable Or Not? Here Is What We Know.

Drive-In Rally at Broward College - Coconut Creek, FL - October 29, 2020

The IRS’ extended tax day deadline of May 17 is fast approaching, and it brings with it more questions than normal. Taxes and Tax Day are made more complicated this year by all of the extra additions and quirks resulting from the ongoing effects of the COVID-19 pandemic and the government’s various COVID-relief measures.

This year’s taxes bring with them a number of added benefits that many Americans will want to take advantage of, including refunds for those people who paid taxes on unemployment benefits received in 2020 as well as reduced costs for health insurance premiums.

The pandemic has also brought with it unique challenges or questions relevant for filing 2020 taxes, such as the need for taxpayers who typically live in one state but work in another to understand how working from home may have changed their tax filing requirements.

Stimulus payments also factor into tax questions for many people this year. For many Americans, their ability to receive all or some of their third-round federal stimulus payment of up to $1,400 is dependent on their filing a 2020 tax return. This includes those people about whom the IRS previously did not have sufficient information before they filed a 2020 tax return, as well as those people whose initial eligibility for a stimulus payment was based on information in their 2019 tax returns, but whose 2020 returns indicate that they are eligible for more money following a loss of income or a change in dependent status through what the IRS calls “plus-up” payments. The IRS’ most recent batches of stimulus payments have focused primarily on distributing payments to these groups of people.

For the recipients of the over 165 million stimulus payments sent out by the IRS as part of the third-round of payments, questions no doubt have been raised about the implications of those payments on their taxes. Fortunately, these payments are not taxed like income and, as a result, cannot be taken away from you even if you owe money for taxes.

The third-round of stimulus payments are not, however, protected from garnishment, and as a result, they can be claimed by debt collectors as a result of unpaid expenses such as medical or credit card bills. This was the result of the American Rescue Plan coming into law via a budget reconciliation; previous stimulus payments, including the $600 payments from last December, were protected from garnishment.

Also relevant to stimulus payments in this year’s taxes is the inclusion of a recovery rebate credit, which allows those people who did not receive all of the money they were eligible for during the first two rounds of federal stimulus payments to claim any outstanding money that is available to them.

Written By

Eli Fuhrman is an Assistant Researcher in Korean Studies at the Center for the National Interest and a recent graduate of Georgetown University’s Security Studies Program, where he focusedd on East Asian security issues and U.S. foreign and defense policy in the region.

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