Apparently there's a TikTok video going around stating that the Stimulus Checks the government is sending out for the Economic Impact Payments from the CARES Act, have to be paid back on next years taxes. Here's why this is completely false, and all it takes is a little math and understanding of what a Tax Credit is to debunk this notion.
The one truthful thing the guy mentions in his video, is that the Stimulus Check is an Advance on a Tax Credit on your 2020 tax return.
What Is An Advance?
What is an advance? An advance is when you receive something before you were originally scheduled to receive it. Typically you may hear this in regards to maybe an employer or a bank which will give you your "paycheck" a week earlier than you normally would have received it. Typically banks and other businesses who provide this service will charge you a flat fee or a percentage of the amount that you want to advance. But what they are giving you is what you are already going to receive anyway! So when you receive what you were going to receive anyway, it is then your job to "pay back" what you borrowed.
I believe this is why the maker of the viral TikTok video confused their statement, either intentionally or unintentionally, and stated that you will have to pay back the money next year. But this is false.
What is a Tax Credit?
Next let's talk about the definition of a Tax Credit. A Tax Credit is a dollar amount used to reduce your tax bill as a whole, or provide you with a refund if it is a refundable tax credit. This is different from a Tax Deduction, which reduces your taxable income, not your actual tax bill dollar for dollar. So let's break this down.
Let's say you should have paid $10K in taxes, but instead you only paid $8K in taxes. This would mean that you owe the IRS $2K in taxes, so you would have a tax bill. However let's also state that you have a $2K tax credit. Since Tax Credits are dollar for dollar credits towards your tax bill, this would completely wipe out your tax bill and you owe the IRS nothing.
However let's flip it, and say that you paid $12K, only owed $10K in taxes, and now you have an overpayment of $2K. This means that the IRS owes you a $2K refund, because you paid more in taxes than you really needed to. As a reminder...this is the only way you receive a REFUND, that's why it's called a refund! You overpaid! But, since you also have a $2K REFUNDABLE Tax Credit, now the IRS owes you $4K. $2K + $2K = $4K
Now that you are clear on how a Refundable Tax Credit works, let's now look at the Stimulus Check, which is being provided as an advance tax credit, on your 2020 taxes.
In example 1, you owed $2K in taxes, but because you had a $2K tax credit, your tax bill was cut to zero. Now let's add an additional $2K tax credit for the coronavirus stimulus check. Since this is a refundable tax credit, the IRS now owes you $2K! Doesn't that sound awesome? But wait...the IRS already gave you the $2K in April of 2020, so when you file your 2020 taxes in early 2021, you won't actually get the additional $2K in your pocket at that time...you've probably already spent it! This means that your tax bill stays the same as it would have been without the stimulus, which was ZERO!
It is the same case in example 2. Remember in example 2 the taxpayer paid $2K more than they should have paid in the year 2020. Now because of the $2K stimulus check, they are now owed $4K since the stimulus check is a refundable tax credit! Wrong! Why? Because they already gave you the $2K check in April of 2020, which means that your tax refund stays the same at $2K!
If You Didn't Receive Stimulus...
Now, where people will likely bring up that there's an issue, while others will think that they received a larger refund once they file taxes in 2021 is if you were a person who worked less than you typically would have if not for the coronavirus pandemic. Your taxes may look significantly different than it normally would, but the reason won't be because of the advance tax credit you received via the Stimulus Check. If you don't receive an economic impact payment now based on your 2018/2019 taxes, and you end up qualifying in 2021 due to lower income once you submit your 2020 taxes, then you would see a difference in your actual tax return. Since you didn't receive the stimulus check in 2020, the tax credit you receive once you file your 2020 taxes will be impacted by the new tax credit!
I hope this was helpful in debunking the fake news from the TikTok video which went viral. I'm sure there are similar videos out from multiple people, but I wanted to make sure that people understand what is really going on with these stimulus checks, and that any differences in your taxes when filed next year won't be due to the coronavirus stimulus check if you already received payment.
AJ Mobile Money
Husband | Father | YouTuber | Former ATLien
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