Financial aid in connection with coronavirus and taxes: what you need to know in 2021
Millions of US residents are still waiting for the first or second payment of financial assistance in connection with the coronavirus, while the Senate continues to negotiate a third. The Internal Revenue Service (IRS) does not consider this money taxable income, recalls CNBC.
This year's tax filing starts a little later, with the IRS announcing that it will begin accepting and processing tax returns for 2020 on February 12 - as opposed to the end of January as it does in most years. This date was chosen so that the agency had time to prepare for the paperwork for new payments of financial assistance. The deadline for submission of documents remains the same - April 15.
There is no need to worry that the additional money that you received in the form of financial assistance will be taxed. However, the amount of the monetary incentive you are entitled to may change the tax refund. Here's what you need to know.
Are financial aid checks subject to income tax?
According to the Economic Impact Payment Clearinghouse on the IRS website, none of the two previous payments made in 2020 are considered taxable:
“… The payment is not included in your gross income. Consequently, you will not include the payment on your taxable income on your federal tax return or pay income tax on your payment. This will not decrease your refund or increase your debt for your 2020 federal tax return. ”
The payment will also not affect your income for purposes of determining eligibility for federal assistance or benefit programs.
If you haven't received your incentive money, it will most likely come in the form of a tax credit, which means it will be included in your tax refund.
On the subject: Tax season 2021: key dates and IRS recommendations
What to do if you didn’t receive financial aid last year
If you haven't received one or any of the incentive checks since 2020, you will have to apply for a payback tax credit this year to get the money you're owed.
Recovery Rebate Credit is a tax credit from your 2020 income tax. The IRS explains that taxpayers applying for this loan will see either an increase in their tax refund or a decrease in the amount of taxes they owe.
Suppose, hypothetically, that you owe $ 2000 in taxes this year, but you still have not been paid $ 1800 on two 2020 coronavirus checks. You will only owe tax $ 200 due to the tax credit compensation.
Alternatively, if you are expecting a tax refund, your total refund may be higher this year when you factor in incentive money.
Look up IRS Notice 1444 and IRS Notice 1444-B to get an idea of what to expect. These are the letters that you should have received, indicating the amount of your financial aid payment.
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How best to use financial aid
If you have been waiting for financial aid payments for so long, you may already have plans for a tax refund. Taking care of bad bills, high interest credit card balances and basic necessities like food and lodging should be your top priority when deciding what to do with your money, experts say.
But if you are satisfied with all of your basic needs and feel safe at work, there are additional ways you can use your tax refund. For example, this might be a good time to open (or grow) your emergency fund or other large investment.
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