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A guide to stimulus payments and your 2020 tax return

If you’re one of the millions of Americans who have received stimulus payments, you may be wondering if that money will have any impact on your 2020 tax return. The good news is that stimulus payments are not taxable.

As stated by the IRS, “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.”

What if you expected a stimulus payment – from either round – that you didn’t receive, or the amount was less than you expected? There could be good news here, too. You can use your 2020 tax return to obtain eligible funds.

The IRS calls it a Recovery Rebate Credit, and if you didn’t receive the full amounts of either stimulus payment (or didn’t receive your payment at all), you can claim this credit on line 30 of your 2020 Form 1040 or 1040-SR.

This can be done because the stimulus payments are tax credits that were distributed in advance. A tax credit, in case you’re wondering, is a direct reduction of your tax bill. In other words, that $600 payment is a $600 reduction on your taxes. It’s different than a tax deduction, which only lowers your taxable income. To use that same example, if you had a $600 tax deduction and you’re in the 22% tax bracket, that deduction would save you $132. (In math terms: 600 x .22 = 132.) A deduction is nice, but a credit is better.

If you’re thinking about claiming the Recovery Rebate Credit on your 2020 tax return, there are a few things to keep in mind. The first is that you’ll need to verify what the government believes you should have received.

The IRS sent letters to everyone eligible to receive stimulus payments with this information. These were officially labeled Notice 1444 for the first payment and Notice 1444-B for the second. If you didn’t receive this letter or lost it, don’t worry – you can calculate the amount on your own. The IRS provides guidelines for calculating the amount of the first stimulus payment as well as the second.

A second thing to keep in mind is that the two payments were set up differently. Here’s a comparison:
First Stimulus Payment Second Stimulus Payment
Amount for individuals $1,200 $600
Amount for married couples $2,400 $1,200
Amount for each qualifying child $500 $600
Maximum adjusted gross income to receive full payment $75,000 if filing as single $112,500 if filing as head of household
$150,000 if married filing jointly
$75,000 if filing as single
$112,500 if filing as head of household
$150,000 if married filing jointly
Maximum adjusted gross income to receive any payment $99,000 if filing as single
$136,500 if filing as head of household
$198,000 if married filing jointly
$87,000 if filing as single
$124,500 if filing as head of household
$174,000 if married filing jointly
As you can see, the second payments are lower than the first, and the income cutoff for the second payment is also lower. If you and your spouse had an adjusted gross income (or AGI) of $180,000 on your 2019 tax return and filed jointly, you would have received money from the first round of stimulus payments, but not the second.

One last thing to note is that if you claim a Recovery Rebate Credit on your 2020 taxes, the amount of stimulus payment you receive will be based on your 2020 tax return, not your 2019 tax return. Both payments were initially distributed based on taxpayers’ 2019 AGI. If your AGI for 2020 is higher than in 2019, the amount you can claim may go down or disappear altogether.

Also, if you had or adopted a child in 2020 and meet the income requirements, you may be eligible to claim the stimulus amounts for them on your 2020 taxes. Since the IRS has been calculating payments based on 2019 tax returns, they wouldn’t be aware of these new additions to your family. As long as they were born or adopted by December 31, 2020, they’re eligible. You can use the Recovery Rebate Credit to claim it.

While we’re on the topic of stimulus payments and taxes, there’s yet another wrinkle to consider when and how you file. As you’ve likely heard, Congress is contemplating another round of stimulus payments as part of a $1.9 billion bill. If you believe you’ll be eligible for this stimulus payment and want to receive it as quickly as possible, make sure the IRS has your direct deposit information on file by electing to receive your 2020 tax return electronically.

If you’re considering using services that allow you to get your tax refund faster or delay paying your tax preparation costs upfront, you may want to weigh the value of such services. That’s because these services, which are offered by some tax-preparation companies, use temporary bank accounts, into which your tax return is eventually deposited by the IRS. That means the IRS has these temporary accounts on file, not your actual bank account information. Should another round of stimulus payments be approved, you would have to wait for a check to arrive in the mail, rather than have it deposited electronically.

As always, be sure to consult a tax professional to clarify any uncertainty you may have about your taxes. You can also visit the IRS’ online hub or its Recovery Rebate Credit page for detailed information about coronavirus tax relief and the stimulus payments. Commerce Bank also has helpful information about the second round of stimulus payments.

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