Coronavirus and Your Money

Will Your Stimulus Check Increase Your Tax on Social Security Benefits?

The answer to this question comes down to whether your stimulus check increases your "provisional income."

We've had two rounds of stimulus checks so far – and another round is right around the corner. It's nice getting unexpected money, and for some people it's a life saver. Whatever your situation, we hope you're able to put the money to good use.

But many seniors are wondering how these stimulus checks are going to impact their taxes – especially the tax on Social Security benefits. April 15 will be here before you know it, so you'll need to file your 2020 tax return soon if you haven't done so already. You sure don't want an unpleasant surprise when you do file your return. So, if you're a retiree, hopefully we can put your mind at ease about stimulus checks and taxes on your Social Security benefits.

[Stay on top of all the new stimulus bill developments – Sign up for the Kiplinger Today E-Newsletter. It's FREE!]

How Social Security Benefits Are Taxed

Let's start by explaining how Uncle Sam taxes Social Security benefits. The federal government can tax up to 85% of your Social Security benefits. To figure the tax on your benefits, you first need to determine your "provisional income." This is equal to the total of (1) 50% of your Social Security benefits, (2) your tax-exempt interest, and (3) your adjusted gross income (not including the student loan interest deduction or the tuition and fees deduction).

If you're single, none of your Social Security benefits are taxed if your provisional income is less than $25,000. If your provisional income is between $25,000 and $34,000, then up to 50% of your Social Security benefits may be taxable. If your provisional income is more than $34,000, then up to 85% of your benefits may be taxed.

For married couples filing a joint return, your Social Security benefits are safe if your provisional income is less than $32,000. The 50% rate applies if your provisional income is between $32,000 and $44,000. If your provisional income exceeds $44,000, up to 85% of your benefits may be taxable.

Stimulus Check's Impact

Any additional taxable income will increase your adjusted gross income, which then increases your provisional income for Social Security tax purposes. If your provisional income goes up enough to move you from the 0% to the 50% bracket, or from the 50% to the 85% bracket, then you're looking at a tax increase. So, the key question is whether your stimulus checks boost your taxable income.

Stimulus checks are really just advanced payments of a new Recovery Rebate tax credit for the 2020 tax year. As such, they aren't included in taxable income. So, your stimulus check won't increase your AGI, or your provisional income. And if your provisional income doesn't go up, the tax on your Social Security benefits won't either.

What About State Taxes

Unless you live in a state with no income tax, you'll have to file a state income tax return, too. The good news is that your stimulus payments won't raise your state taxes, either. Most states don't tax Social Security benefits. So, there's no reason to worry if you live in one of those states.

You're also safe if you live in one of the handful of states that do tax Social Security payments (either full or partially). That's because the calculation of your state tax liability is going to start with either your federal AGI or federal taxable income. We already established that stimulus payments won't increase your federal AGI. And, if your federal AGI isn't higher because of the stimulus checks you receive, then your federal taxable income won't be higher, either. Since your stimulus payments aren't being carried over as income on your state income tax return, you won't end up paying state tax on that money.

What if You Didn't Get a Stimulus Check?

If you're eligible to receive a first- or second-round stimulus check, but you didn't get it (or it wasn't for the full amount), you're not necessarily out of luck. You may qualify for the Recovery Rebate credit on your 2020 tax return for the stimulus money you should have received.

You can claim the Recovery Rebate credit on Line 30 of your 2020 Form 1040 or Form 1040-SR. There will be a worksheet you can use to calculate the amount of your credit, if any, in the instructions for those forms.

To get any tax refund as quickly as possible, file your tax return electronically and sign up to have your refund directly deposited into your bank account. Once the IRS has your bank information, it can send you any future stimulus payments by direct deposit, too.

Most Popular

Why Are Gas Prices Still Going Up?
spending

Why Are Gas Prices Still Going Up?

The cost of a gallon of gas is at an all-time high. What’s driving the surge and will gas prices go down anytime soon?
May 23, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
Education is Key: 3 Financial Lessons for Retirees Nearing Retirement
retirement planning

Education is Key: 3 Financial Lessons for Retirees Nearing Retirement

When it comes to retirement planning, educating yourself can keep you from making big mistakes. Here are three key lessons that everyone preparing for…
May 24, 2022

Recommended

Will a Gas Tax Holiday or Suspension Lower Gas Prices Near You?
Tax Breaks

Will a Gas Tax Holiday or Suspension Lower Gas Prices Near You?

One way to bring down the price of gasoline is to establish a gas tax holiday. But will Uncle Sam, or your state government, suspend the gas taxes tha…
May 27, 2022
Short-Term Insurance Plans' Good, Bad and Ugly
retirement

Short-Term Insurance Plans' Good, Bad and Ugly

You'll need a squinty-eyed analysis to gauge the value of short-term care insurance plans and if they're right for you.
May 26, 2022
Where's My Refund? How to Track Your Tax Refund Status
tax refunds

Where's My Refund? How to Track Your Tax Refund Status

The IRS has an online tool that lets you track the status of your tax refund.
May 25, 2022
Which States' Taxes Are Going Down
Tax Breaks

Which States' Taxes Are Going Down

State lawmakers are cutting income, sales and property taxes to return budget surpluses to residents.
May 25, 2022