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Already it threatens to be a confusing tax season as millions of Americans still wait for their first and second stimulus checks of 2020, and the Senate pushes back on President Joe Biden’s $1.9 trillion contingency plan calling for a third check ( this time for $1,400).
Tax filing will also begin a little later this year: The IRS announced it will begin accepting and processing its 2020 tax returns on Feb. 12—as opposed to the end of January like most years—to give the agency time to prepare. on the new incentive paperwork. The deadline to submit still remains April 15.
If you’re concerned that the extra boost you got from the incentive checks counts as taxable income, don’t worry. However, the stimulus money you owe may change how much you get back in your refund. Here’s what you need to know about your stimulus check and taxes.
Are incentive checks taxable income?
According to the Economic Impact Payment Information Center on the IRS website, neither of the two previous incentive checks delivered in 2020 are considered taxable:
“…the payment is not included in your gross income. Therefore, 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 tax return.”
The payment also doesn’t affect your income level to determine your eligibility for federal government aid or benefit programs.
If you haven’t received your incentive money, it will come in the form of a tax credit, meaning it will be packaged with your tax refund.
What if I didn’t get last year’s incentive checks?
If you didn’t get one or any of the 2020 incentive checks, you’ll need to apply for a Recovery Rebate Credit this year when you do your taxes to get the money you owe.
The Recovery Credit is a tax credit on your 2020 income tax. The IRS explains that taxpayers who claim this credit will see either an increase in their tax refund or a decrease in the amount of taxes they owe.
Assume, hypothetically, that you have a $2,000 tax bill this year, but still owe the full $1,800 from the two 2020 incentive checks. You only owe $200 because of the tax credit settlement.
If you expect to receive a tax refund, the total amount of your refund this year may also be higher when incentive money is taken into account.
Refer to IRS Notice 1444 and IRS Notice 1444-B to get an idea of what to expect. These are the letters you should have received by post containing the amount of your Economic Impact Payment.
How to best use your incentive money?
If you’ve been waiting this long for your incentive check, you may already have plans for your tax refund. Taking care of delinquent bills, high interest on credit card balances, and immediate needs such as food and shelter should be your number one priority when deciding what to do with the money.
But if you’ve got all your basic needs covered and feel safe in your job, there are other ways you can use your tax refund.
Now may be a good time to start (or bolster) your emergency fund. A high-yield savings account that yields a better interest rate than the national average of 0.05% can help you stretch your money a little further and save more for future needs.
The Vio Bank High Yield Online Savings Account currently offers one of the highest APY rates for high-yield savings accounts (APYs can go up and down). A minimum deposit of $100 is required to open an account, which is low enough to use some of your tax refund and still have money left over for other expenses.
There are no monthly fees to open a Vio savings account as long as you choose to go paperless. (Otherwise, there’s a $5 monthly fee for anyone who receives paper bills.)
Vio Bank High Yield Online Savings Account
Information about the Vio Bank High Yield Online Savings Account has been independently collected by CNBC and has not been reviewed or provided by the bank prior to publication. Vio Bank is a division of MidFirst Bank, member FDIC.
Annual Percentage Yield (APY)
None, if you opt for paperless statements (otherwise $5 per month)
Up to 6 free withdrawals or transfers per statement cycle *The withdrawal limit for a cycle of 6/statements will be lifted during the coronavirus outbreak under Regulation D
Excessive transaction fees
Offer a checking account?
Offer ATM card?
Vio charges a $5 dormant account fee if you let your savings go 12 months with no transactions. The best way to avoid this is to use your incentive to open the account and then set up a monthly recurring deposit from your checking account.
It’s a win-win situation: Behavioral experts argue that automated wire transfers are the easiest way to prioritize savings. Of course, this technique works best if you get paid on a predictable schedule, but anyone can get started with a small amount (say $25) and increase their savings over time.
For other options at no cost, check out CNBC Select’s list of the best high-yield savings accounts.
Editor’s Note: Opinions, analyses, reviews or recommendations in this article are those of the Select editors only, and have not been reviewed, approved or otherwise endorsed by any third party.