by Brenda Hershkowitz, EA, Premiere Tax & Accounting Services
As a result of the CARES Act, the IRS issued two economic impact payments in 2020 as part of the economic stimulus efforts. The point was to try and stimulate our economy. These payments are not taxable income.
The first economic impact payments were up to $1,200 per person and $500 per qualifying child. The second payments were up to $600 per eligible individual and $600 per qualifying child. If you were an eligible taxpayer and did not receive the full amount you should have, you will be able to claim the Recovery Rebate Credit when you file your 2020 tax return.
Taxpayers will not owe tax on the economic impact payments because they are in the form of a tax credit. Tax credits reduce your tax liability.
The IRS issued these refundable tax credits in the form of the economic impact (or stimulus) payments to get them to the public sooner rather than waiting for everyone to file their 2020 tax returns.
However, on a side note, unemployment benefits are taxable.
Due to the shutdown of many businesses as a result of COVID-19, many people had to file for unemployment benefits. These benefits are income. Many people chose not to have taxes withheld from their unemployment benefits and may be facing a tax bill when they file this year.
As for those who withdrew money from retirement accounts — allowed under the CARES Act — they will not be penalized for early withdrawal for pandemic-related distributions. However, funds pulled from a tax-deferred account, 401K, or traditional IRA, will be subject to income tax on the withdrawals.