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Stimulus Payments Could Make Tax Season a Nightmare in Early 2021

Stimulus Payments Could Make Tax Season a Nightmare in Early 2021

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Stimulus Payments Could Make Tax Season a Nightmare in Early 2021

The COVID-19 pandemic has caused a huge amount of pain and suffering. Not all of the negative impacts have been health-related, though. The measures required to keep the coronavirus outbreak under some semblance of control have had huge financial implications for hundreds of millions of Americans.

To help struggling Americans, the federal government provided stimulus payments early in 2020. Attempts to approve a second round of stimulus payments have thus far not been successful.

Meanwhile, as the end of the year approaches, people are starting to think about tax planning for the 2020 tax year. With many anxiously awaiting the start of tax season in January 2021 to claim refunds, there will likely be a lot of confusion about stimulus payments and other measures intended to help people out. That could make tax preparation a real nightmare early next year.

Image source: Getty Images.

Do I get another stimulus payment?

The whole new set of instructions about claiming stimulus payments on the 2020 tax returns will probably cause the most confusion. The draft 1040 form for the 2020 tax year includes a line for taxpayers to include a recovery rebate credit -- the technical name for the stimulus payment.

That line is there because stimulus payments were technically structured as a 2020 tax break. The Treasury Department only looked back at 2018 and 2019 tax returns and made payments based on those numbers in order to get money to Americans quickly.

It's a good thing that this line is on the tax return. Those who didn't qualify for stimulus payments based on their 2018 and 2019 income but who do qualify based on lower 2020 income will finally be able to get their money. Additionally, those who had qualifying dependents but for some reason didn't get credit for them in their stimulus checks will be able to get the proper amount.

However, some taxpayers might mistakenly think that they can claim another stimulus payment based on this line on their tax returns. What you're supposed to do is net out any money you've already received against your calculated recovery rebate credit. So if you've already gotten the proper amount, you won't get anything more on your 2020 tax return.

That line on the 1040, though, looks awfully tempting. Despite the always-painful "see instructions" printed right on the return, some taxpayers will inevitably think they get a second bite at the apple -- and end up making a costly mistake.

Do I have to pay my stimulus check back?

On the other hand, some people are inevitably going to be scared that they need to pay back the stimulus payments they've already received. If you qualified to receive a stimulus check based on your 2018 or 2019 income and your 2020 income ends up being higher, then the calculations on your 2020 tax return might show that you're not entitled to a recovery rebate credit.

Normally, if you get an advance payment of a credit that you turn out not to be entitled to get, you have to pay it back. It's natural for taxpayers to think the same rule applies here with stimulus checks.

However, the federal government was extremely clear that those who got stimulus checks earlier this year won't have to pay them back. Even if their tax situation changed in 2020 so that they wouldn't have been eligible to receive those payments, the Treasury won't go after them.

Some taxpayers, though, are extremely scared of the IRS. That could prompt people to think they should pay back their stimulus money even though they don't have to do it.

Be ready for anything

This confusion will only get worse if there's a second round of stimulus checks. Trying to tie them all together for tax planning purposes will become a tangled mess.

Nevertheless, you shouldn't panic about the coming tax season. Just knowing that the issue is out there will help make sure you get the stimulus money you deserve and keep what you've already gotten.

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