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Do Stimulus Payments Impact Your Tax Refund?


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Many people are wondering if the stimulus payments provided during the pandemic will affect their tax refund. However, since stimulus payments are not considered taxable income, they won’t be considered as additional income by the IRS when calculating your return. The only way stimulus payments could affect your taxes is if you were eligible to receive them but didn’t get them. In this scenario, claiming the Recovery Rebate Tax Credit on your taxes could increase your refund.


If you are concerned about filing your taxes incorrectly or aren’t sure how to claim the Recovery Rebate Tax Credit, a skilled tax resolution lawyer can be a great resource. Here is some helpful information to know about the Recovery Rebate Tax Credit and how to claim it when you file your taxes.


What Is a Tax Credit?


Tax credits decrease the amount of state and federal income tax you owe during tax season. Unlike deductions, which reduce your taxable income, tax credits reduce the amount of tax you owe dollar for dollar. Tax credits are used to promote certain behaviors or help disadvantaged taxpayers and are considered more favorable than deductions. There are two kinds of tax credits: nonrefundable and refundable.


Refundable tax credits not only reduce the amount of tax you owe, but could also result in a refund if the credit is more than you owe in taxes. For example, if you are eligible for a $1,000 refundable tax credit but only owed $300 in taxes, the leftover amount from the credit ($700) would be provided to you as a refund. Examples of refundable tax credits include:


  • American Opportunity Tax Credit.

  • Earned Income Tax Credit.

  • Child Tax Credit.


Nonrefundable tax credits provide taxpayers with a refund of the amount they owe and nothing more. For example, if you are eligible for a nonrefundable tax credit totaling $1,000 but all you owe is $300, you would not receive the remaining $700 as a refund. Instead, you would use the tax credit to reduce your taxes by the amount you owe, or $300. Examples of nonrefundable tax credits include:


  • Adoption Tax Credit.

  • Foreign Tax Credit.

  • Mortgage Interest Tax Credit.

  • Residential Energy Property Credit.


The Recovery Rebate Tax Credit


The Recovery Rebate Tax Credit was developed to help Americans struggling in the pandemic. However, unlike other tax credits that are usually provided during tax season as a direct reduction of an individual’s taxes, the Recovery Rebate Tax Credit was provided in advanced stimulus payments. Both the first and second stimulus payments of $1,200 and $600 respectively were essentially advanced payments of the credit. Most people who were eligible for the credit already received their payments; yet, if the combined total of your stimulus checks were less than the Recovery Rebate Credit amount, you may be able to get the difference back when you file your taxes.


Claiming the Recovery Rebate Credit on Your Taxes


While most eligible taxpayers received their stimulus payments in advance and won’t receive additional money from claiming the Recovery Rebate Tax Credit, some taxpayers could benefit from claiming the credit on their taxes. Specifically, if you believe you were underpaid in stimulus payments based on your eligibility, claiming the tax credit when you file will allow you to see if you qualify for more.


The stimulus payments were meant to reflect your 2020 tax situation. However, since they were provided in advance of 2020 returns, the IRS used your most recent tax return—most likely from 2019 or 2018—to determine your eligibility. This means that individuals who had a drastic change in income between 2019 and 2020 may not have received the payments they were eligible for since they had not yet filed their 2020 return. Working with a skilled tax professional is the best way to determine if you may be eligible for more funds through the Recovery Rebate Tax Credit.


Choose Morgan Sebastian for Help With Your Taxes


At Morgan Sebastian Law, Attorney Becky Sebastian is eager to help you navigate the complexities of your filing your taxes. As a trusted tax resolution lawyer, Attorney Becky Sebastian has years of experience representing business owners and individuals who are experiencing tax audits, wage garnishment, and other tax-related issues. She can provide you with the professionalism and peace of mind you deserve when dealing with the IRS.


To schedule a consultation with an experienced tax resolution lawyer, call (877) 223-6605 or fill out our online contact form.