Tax season officially kicks off this week, but a new survey finds that many taxpayers don’t understand how the stimulus packages will affect their taxes.
A February survey conducted by YouGov for Forbes Advisor asked Americans whether or not they believed their stimulus payments are taxable. More than half of the respondents believed they would be taxed or didn’t know if they would have to pay taxes on their stimulus payments. (Spoiler: They won’t.)
The survey also found that Americans with lower incomes and who were less educated often knew more about stimulus check taxes than their wealthier, more educated peers.
College-educated Americans were more confused about the taxability of their stimulus checks than those with a high-school degree. And more Americans with lower household incomes (under $40,000) correctly said that they wouldn’t pay income taxes on their stimulus checks than Americans with household incomes over $80,000 (57% vs. 41%).
Why Americans Are Confused About Whether They Owe Taxes on Their Stimulus Payments
In March 2020, former President Donald Trump signed a $2 trillion stimulus package, known as the Aid, Relief and Economy Security (CARES) Act. Trump signed a second relief $900 billion stimulus package into law in December 2020. Both stimulus packages provided direct payments from the federal government to help Americans weather the economic effects of the pandemic.
But with these stimulus payments also came a lot of confusion—would these checks be taxed? Were they just a temporary allowance that would be clawed back the next year?
While the Internal Revenue Service (IRS) has provided guidance that taxpayers would not need to add the stimulus payment to their gross income, or pay taxes on their payments, the IRS has not done a great job of keeping Americans informed. In 2020, the IRS answered only 24 million calls out of 100 million on its toll-free telephone lines due to limited resources during the pandemic, and many Americans still had questions about their own situation after reading the IRS’ guidance.
Holly Reid, a certified public accountant and financial educator in Atlanta, provided live Q&A sessions shortly after the passage of the CARES Act. Her viewers had a lot of questions about how the payments would work, and Reid recalls a member of her Facebook group asking whether the stimulus payment was actually a loan.
“During the time of the initial stimulus payments, people were concerned that they would have to pay the money back or would be taxed on the money,” Reid says.
Those questions have lingered on taxpayers’ minds, even as Americans wait for a possible third stimulus payment. And while these payments are not taxable, they may still be involved with your 2021 tax return.
You Might Need To Report Your Stimulus Payments on Your 2020 Federal Tax Return
If you received the full stimulus payment (Economic Impact Payments) for the first and second round of payments, you won’t need to claim the Recovery Rebate Credit on their tax return nor pay taxes on the amounts received.
For those who received a partial amount —or no payment at all—for either round of aid, you may be able to claim the remainder on your 2020 tax return through the Recovery Rebate Credit worksheet. You will need to claim it even if you receive a partial payment in error. This allows the IRS to determine if you are eligible for an additional payment or not. Refer to your Notice 1444 to ensure you are claiming the correct amount.
The first full stimulus payment was $1,200 for single individuals and $2,400 for married couples. The second full stimulus payment was $600 for single individuals and $1,200 for married couples.
There was an income cutoff for receiving the full stimulus check and if you earned more than that amount, you may have still received a check—but for a lower amount (hence a “partial” amount). For both rounds of payments, the full stimulus check amount was reduced by $5 for every $100 earned above $75,000 for single individuals and $150,000 for married couples.
If you qualify, the recovery rebate credit will either increase your tax refund or reduce the amount you owe (and the credit can be used for both the first and second stimulus payments).
Americans Believe They Will Face Challenges Filing Their Taxes This Year
According to the YouGov survey, only 5% of Americans expect that filing their taxes would be easier this year. Twenty-eight percent believe that filing their taxes would be somewhat or much harder because of the new pandemic programs. And 35% of millennials (respondents aged 18-34) said that filing would be harder or somewhat harder as a result of the addition of pandemic programs—more than any other age group.
Parents of children under 18 were also more concerned—39% fear their taxes will be harder or somewhat harder to file because of pandemic programs, compared to respondents overall (28%).
