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| The Internal Revenue Service (IRS) is sending out millions of checks in the third round of stimulus payments. As people start to spend their money, some wonder: Is my stimulus payment taxable?
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The short answer: No. In the somewhat longer words of the IRS: “No, the payment is not income and taxpayers will not owe tax on it. The payment will not reduce a taxpayer's refund or increase the amount they owe when they file their 2020 or 2021 tax return next year. A payment also will not affect income for purposes of determining eligibility for federal government assistance or benefit programs." (Source: IRS.gov Tax Tips)
Not your average tax credit
The stimulus payment — or economic impact payment, as the IRS calls it — is technically a tax credit. But this isn't widely understood. Some people assume that the IRS will add the amount to your income, generating a bigger tax bill, or reduce your future tax refund when you file your tax return next year. Neither is the case, but this bears some explaining.
In the tax world, a tax deduction is a good thing. It reduces your income, which reduces the amount of tax you owe. If you had $50,000 in income and had a $5,000 tax deduction, your deduction would reduce your taxable income by $5,000. If you were in the 12 percent tax bracket, you'd reduce your taxes owed by $600 (12 percent of $5,000).