Is My Stimulus Payment Taxable?

This guest commentary is contributed by Ari C. David, Esq., from the San Diego office of Larson & Solecki LLP

Since the start of the coronavirus pandemic, Congress has passed two different stimulus packages sending direct payments to many Americans. Now, a third stimulus is being debated. With the first payment amounting to a maximum of $1,200, the second maxing out at $600, and the third estimated to be approximately $1,400, recipients are understandably happy to receive this boost in income.

However, recipients also might be wondering whether the stimulus payment is taxable, or if the payments will move them into a higher income tax bracket.

Luckily, stimulus payments are not considered taxable income. According to the IRS website,
″…the Payment is not includible in your gross income. Therefore, you will not include the Payment in your taxable income on your Federal income tax return or pay income tax on your Payment. It will not reduce your refund or increase the amount you owe when you file your 2020 Federal income tax return.”

In addition, California’s Franchise Tax Board has confirmed that payments that individuals received from the federal government under the federal CARES Act, or payments received under the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 are not subject to California income tax.

While we do not yet have guidance regarding whether the new round of stimulus will be taxable as income, all signs point to future stimulus checks being considered in the same way.

However, for those who have yet to receive their stimulus payments due to error or other reasons, the payment will now be applied to 2020 taxes as a credit. Therefore, in these cases the stimulus could impact the amount you owe or the refund you receive.

When you file your income taxes, claim the Recovery Rebate Credit. The stimulus will be applied to your tax debt, if any, and reduce the amount you owe by the amount of your credit. Those who are set to receive a refund will see their checks increase by the amount of the stimulus, as it is processed as a fully refundable tax credit.

Income taxes are never simple, and this year might be more complicated than in recent years. Work with an experienced tax professional to address your particular situation.