Third stimulus check: how will it affect your 2021 tax return?

With Congress en route to pass President Joe Biden’s American Rescue Plan before 14 March, how will the $1,400 stimulus checks included affect tax returns?

Third stimulus check: how will it affect your 2021 tax return?

The Senate on Wednesday is expected to begin debate on President Joe Biden’s signature $1.9 trillion covid-19 relief package, which includes a third round of Economic Impact Payments, or better known as stimulus checks. The direct payments will be for $1,400 this time and could start showing up in Americans bank accounts as soon as a week after the bill is signed.

There begs the question though, how will this affect your taxes? Americans have until 15 April, 2021 to file their tax return for their income in 2020 with the Internal Revenue Service (IRS). Just like the previous rounds of stimulus checks, the third direct stimulus payment will be a refundable tax credit called the Recovery Rebate Credit. However, this time round it will be an advance refund payment for your 2021 income-tax filing which you’ll have to do in 2022.

Will I be taxed on the $1,400 stimulus check?

As stated before, the Economic Impact Payments are a refundable tax credit, this means that even if you have zero income you still get the credit as part of a tax refund check. Usually, the IRS waits to see how much you owe in taxes and how much you paid before sending you a check for paying too much in taxes. However, as with the previous two checks Uncle Sam is giving you the money in advance, an early tax refund on your 2021 tax return.

Can the IRS garnish my stimulus check?

The final version of the bill is not yet available as the legislation is still working its way through Congress. It is expected, like the previous rounds, the IRS will not garnish your payment for back taxes. Nor would it take from your stimulus check if you have other outstanding federal and state debts, say child support arrears or student loan payments overdue, this provision was added in the second round of direct payments. Additionally, if the IRS gave you a larger stimulus check than you were due, you will not have to pay back that money.

That however is not the case with the Recover Rebate Credit. There were several circumstances where the IRS sent out the wrong amount or the previous laws excluded groups of possible beneficiaries of the program. Cases in particular include mixed-status families, inmates and dependents of people who receive social security payments.

Can the IRS garnish my Recovery Rebate Credit?

Any individual who didn’t receive the full amount due to them will have to claim the stimulus money owed to them through their 2020 income-tax filing using the Recovery Rebate Credit. You can see how much you received from the Economic Impact Payments through the IRS Get My Payment tool.

If you still have stimulus money that you didn’t receive but you owe back taxes, or have a delinquent state or federal debt, you may not see all of what is owed to you. Banks and other creditors and debt collectors may be able to take away from your refund, too.

Will this affect the $1,400 third stimulus check?

Depending on when the legislation is passed the IRS will use a filers 2020 or 2019 tax return to determine eligibility for how much they should receive in the third round of payments. With tax season currently in progress, the IRS is processing 2020 tax returns that have been filed but some people may not even get theirs filed before the payments start going out.

If the amount that you receive in the third direct payment is less than you should have received, then it can be expected that you would again have to wait to claim the Recovery Rebate Credit but this time when you file your 2021 income-tax return in 2022. Whether that stimulus money can be garnished will depend on the final bill that President Biden signs.

Third stimulus check: live updates

You can get the latest updates on the proposed third stimulus check, and other mooted aid measures such as the expanded child tax credit, by following our dedicated live blog.