Stimulus checks and taxes: What you need to know before filing your 2020 income tax returns

Americans have now received two rounds of stimulus checks, and questions abound about how these payments tie into your 2020 tax returns as filing season approaches.

There’s a link between your tax returns and the stimulus checks: the two payments – the first providing $1,200 per eligible adult and $500 per eligible child and the second distributing $600 for each qualifying adult and child – were based on the adjusted gross income reported on your most recent tax return.

But the process of distributing the stimulus payments hasn’t always gone smoothly. In some cases, people didn’t get their checks at all – or may have received the wrong amount, given life changes like a job loss or the birth of a child.

The good news is that the 2020 tax filing season will allow people who missed out on a check or received too little to claim their full stimulus payments, which the IRS will send later this year via their tax refunds.

“If you didn't receive the full payment you were entitled to, then it's possible that when you are filing your 2020 tax return you may end up getting more money,” says Eric Bronnenkant, head of tax at financial services firm Betterment.

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But, if you received more than you were entitled to, the IRS can’t ask for the money back, he notes. Some people whose incomes jumped in 2019 or 2020 compared with their earlier tax returns – which the IRS relied on to determine whether they qualified for the payments – may be in this situation.

“If your economic situation change – let's say you qualified based on 2018 or 2019 income because it was lower, but your economic situation improved for 2020 – the IRS actually can't ask for any of that money back,” Bronnenkant adds. “Your situation can't get worse in that scenario.”

Here are the basics of what to know about your taxes and the stimulus checks:

Will I owe taxes on the stimulus checks?

No, because the stimulus checks aren’t considered income by the IRS, notes Kathy Pickering, chief tax officer at H&R Block. Instead, they are prepaid tax credits for your 2020 tax return, authorized by two relief bills passed last year that were aimed at stabilizing the U.S. economy amid the coronavirus pandemic.

“If you got the full amount for the first and second payments, you don't need to do anything,” Pickering notes.

I’m not sure I received the right amount. What should I do?

First, check your two stimulus payments against your 2020 adjusted gross income as well as your family situation. That’s because the IRS based your two stimulus checks on either your 2019 or 2018 tax returns – but your income or family size could have changed in 2020.