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VERIFY: Pay attention to tax rules on stimulus payments

Here are some common questions and answers about how stimulus payments affect filing your taxes.

Tax filing season begins Feb. 12 for the 2020 income tax year. Between stimulus payments and taking money out of IRAs and 401(k)s to make ends meet, many tax filers are uncertain how to account for these COVID-19 relief measures on their returns. Here are some common questions.

Do I list my stimulus payments on my return?

“It doesn’t appear on the 1040 anywhere,” said April Walker, lead manager for tax practice and ethics with the American Institute of CPAs. And the payments don’t count as income so there’s no tax on them. It’s possible that if your income was lower in 2020 than it was in 2019, you will be owed more money on the stimulus payments, Walker said. There is a worksheet included in the 1040 instructions to figure that out. And, hopefully, you kept the notices the IRS sent separately that show the amount you received.

What if I never got my stimulus money or got less than I should have? Can I get it on my tax refund?

Yes, the Internal Revenue Service says.

“If you’re eligible for the credit, and we didn’t issue you any Economic Impact Payments or we issued less than the full amounts, you must file a 2020 tax return to claim the Recovery Rebate Credit even if you are not required to file a tax return for 2020,” the IRS says.

Bear in mind that the stimulus checks were based on your 2018 or 2019 tax year information. Under the Recovery Rebate Credit, the eligibility and the amount are based on your 2020 tax return.

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If you made more money in 2020 than in 2019 -- enough that you would no longer qualify for the stimulus payment -- do you have to pay the government back?

No. There is no provision in the law that requires individuals who qualified for a payment based on their 2018 or 2019 tax returns to pay back all or part of the payment, the IRS says.

Among the examples: a child who counted as a dependent on your 2018 or 2019 returns but won’t for 2020 because of age. You do not have to return the money even though you can no longer claim that child as a dependent, the IRS says.

I took money out of my retirement savings to make ends meet. Am I going to pay a penalty?

The CARES Act that Congress passed in 2020 took some of the usual sting out of using your IRA, 401(k) or 403 (b) account if you had a hard time getting by because of COVID-19.

The CARES Act lifted the 10% penalty on withdrawals before age 59½ from those accounts, limited to no more than $100,000 total. But know that you had to meet the IRS’ criteria on hardship regarding the coronavirus. 

You report the withdrawal as income on your tax return, but you have the option to break it up over three years. Say you took $6,000 out: You could report $2,000 as income for 2020, $2,000 for 2021 and $2,000 for 2022. You also have three years from the date you received the withdrawal to redeposit the money so that you face no income tax on it. But it would be good to talk with a CPA in such cases to know your best route, Walker said. 

If, say, you repay all the money you took out in 2022, you can amend your 2020 to remove the tax on the retirement account distribution, she said. But the rules are a little sticky, so check with your retirement account administrator about putting the money back in.

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