Will you be hit with a big tax bill on your stimulus money?

Since the IRS first sent out stimulus checks, many have wondered how it will affect their taxes. Stimulus money is technically a tax credit, which means it doesn’t count as income and normally won’t raise your tax bill.

If you received an overpayment, that’s a different story, and you may need to repay that on your taxes. However, the rules vary on this. To help you know what to expect, we’re going to cover when you will and won’t have a bigger tax bill because of stimulus money.

WAITING ON A TAX REFUND FROM LAST YEAR? HERE’S SOME GOOD NEWS

You won’t need to repay stimulus money if your income increased

Probably the most common worry is that you’re going to need to pay back stimulus money because your income was too high. The stimulus checks all had income limits attached, and the IRS calculated how much to send based on your most recent tax returns at the time.

For example, single filers who made at least $80,000 weren’t eligible to receive the stimulus check that was sent out in 2021. But what if you made $75,000 in 2020, and then $100,000 in 2021? You would have received that stimulus check based on your 2020 income, even though you wouldn’t qualify based on your 2021 income.

For overpayments like these, you’re not required to pay anything back. It’s the rare case where the IRS will let you keep the extra money.

BEHIND ON FILING YOUR TAX RETURN? MAKE THIS KEY MOVE

Here’s when you’ll have a tax bill on stimulus money

There are some situations where a stimulus overpayment may result in a larger tax bill. They don’t apply to most people, but it’s good to know about them, just in case any of them apply to you.

You miscalculated when claiming a Recovery Rebate Credit

The Recovery Rebate Credit is a tax credit available to those who didn’t get as much stimulus money as they should’ve. If you’re still owed stimulus money, you can claim a Recovery Rebate Credit.

If you made a math error when claiming this credit, you’re probably going to get a letter from the IRS. The IRS has already contacted millions of people who miscalculated on last year’s credit. If you’re claiming the 2021 Recovery Rebate Credit, make sure to double check everything so you don’t get an overpayment.

GET FOX BUSINESS ON THE GO BY CLICKING HERE

You received an overpayment on a Child Tax Credit

Parents of minors were able to receive additional stimulus money through the Child Tax Credit. For 2021, the maximum credit amount was $3,600 per child 5 years old or younger and $3,000 per child 6 to 17 years old. Half of the credit was sent out in monthly payments from July through December, and parents can claim the other half on their tax returns.

Like the stimulus checks, the Child Tax Credit had income limits. Unlike the stimulus checks, the IRS isn’t being so lenient about overpayments.

The IRS used info from 2020 tax returns to calculate how much to send parents. If anything changed in 2021 that would lower the credit amount you qualify for, you may have received an overpayment. Here are a few common reasons you may need to repay the Child Tax Credit:

  • Your income was higher in 2021 than it was in 2020.
  • You’re claiming the credit for fewer children. This could happen if you divorced and your ex-spouse claimed your children as dependents on their taxes.
  • Your main home wasn’t in the United States. To be eligible for this credit, your principal residence must have been in the U.S. for more than half the year.

CLICK HERE TO READ MORE ON FOX BUSINESS

You received an extra stimulus check

During the third round of stimulus payments, some people received two $1,400 checks instead of one. The IRS recommended sending the extra check back and sent instructions on what to do. If you deposited both checks and haven’t returned the extra payment yet, there’s a good chance the IRS will contact you about it.

In most cases, stimulus money isn’t going to lead to a tax bill. If you simply received the three payments in 2020 and 2021, there likely isn’t any reason you’ll need to pay money back. However, you could owe money if you miscalculated on a tax credit, received an overpayment on the Child Tax Credit, or if you got a double payment.

If you think you’ll need to repay any stimulus payments, start setting money aside in a savings account so you’re financially prepared. The IRS only provides a limited amount of time to pay tax bills, and having the money saved makes it much easier.

The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team. The Motley Fool has a disclosure policy.