KEY POINTS
  • A new Senate bill proposes the government send $1,200 to individuals and $2,400 to couples in the wake of the coronavirus pandemic.
  • Those amounts would start getting phased out at adjusted gross income of $75,000, based on 2018 tax returns.
  • While you're probably focused on how big your check will be, you should know that there also could be a pinch from the government in the form of income taxes.

Many Americans may soon get checks in their hands from the government. But Uncle Sam could also claw back some of that money.

Information about how much those checks will be – and whether or not individuals will pay tax on them – will likely be hammered out in a deal by politicians very soon.

On Thursday, Senate Majority Leader Mitch McConnell, R-Ky., unveiled a bill that proposes giving $1,200 to individuals, $2,400 to married couples and $500 per child.

Those checks would start to phase out for individuals who had $75,000 or more in adjusted gross income, or $150,000 for married couples who file jointly, according to their 2018 tax return.

The proposal currently calls for giving that money as a credit against your taxes.

"So this wouldn't be taxable, because it's your own money back essentially," said Jeffrey Levine, director of advanced planning at Buckingham Strategic Wealth in Long Island, New York.

There are three parts to determine what you would receive, according to McConnell's proposal.

If your individual tax liability is between $600 and $1,200, you get back the amount of your tax liability. If it's below $600, you would get $600. And if it was more than $1,200, it would be capped at $1,200. Those amounts would double for married couples.

Keep in mind that the proposal has not been finalized and is subject to change as lawmakers negotiate.

The amounts McConnell is proposing are different from those discussed by Treasury Secretary Steve Mnuchin. On Thursday, Mnuchin confirmed that the Trump administration wants to send $1,000 to every American adult and $500 to each child.

"They could do whatever they want at this point," Levine said. "They could just say, here's $1,200.

"It's tax-free to everybody," he added. "Or they could make it taxable income."

There are a few potential scenarios for how tax may or may not be applied to any checks you receive.

An advance on a future refund

The government could make it so that the cash payment may have to be repaid on that year's tax return, said Margy Dunn, an enrolled agent at Compass Tax & Financial Services in Monterey, California.

For example, say you're single and you receive a check for $1,000 now. Next year, if you're supposed to get a refund for $3,000, the government would deduct that $1,000 and give you the net difference of $2,000 as your 2020 refund, Dunn said.

A gift from the government

Alternatively, the government could consider the checks a gift, which would likely mean it would be considered taxable income, Dunn said.

People would have to pay levies on the money based on their particular tax bracket.

"The people who are making $50,000 to $150,000 normally, those are the ones that are really going to feel the pinch if they have to pay tax on it," Dunn said.

If given a choice between an advance on 2020 taxes or paying tax on it, Dunn said she would prefer having the money taxed.

That's because low-income taxpayers would benefit more. If it is a rebate, you would likely have to repay the money no matter what, she said.

Tax-free money

The last alternative is that the money could be tax-free. Experts disagree on whether or not this is feasible.

"Generally, I would think that there would be no tax implication" if the government provides the payments in the form of a federal tax lien, said Barry Picker, a certified public accountant and certified financial planner at Picker & Auerbach in Cedarhurst, New York.

"My guess is that it would not be taxable, at least to the lower-income individuals that the money is targeting," said Thomas Neuhoff, tax supervisor at Henry & Peters PC, with offices in Tyler and Longview, Texas.

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Because it's harder to do needs-based testing now, there could be a clawback or tax later for those who receive a benefit but end up making too much money, Neuhoff said.

Dunn said that anything you receive is considered income under the U.S. tax code unless it's specifically exempt. But there are exceptions for gifts, which is defined as something for which you expect nothing in return.

"Otherwise, technically if you find $20 on the ground, believe it or not, you're supposed to report that as income," Dunn said. "Not that people do, but that's what's in the Internal Revenue Code."

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