It's already shaping up to be a confusing tax season, as millions of Americans are still waiting on their first and second stimulus checks from 2020, and the Senate pushes back on President Joe Biden's $1.9 trillion relief plan calling for a third check (this time for $1,400).
Tax filing also begins a little later this year: The IRS announced it will begin accepting and processing 2020 tax year returns on Feb. 12 — as opposed to late January as it does most years — to give the agency time to prepare for the new stimulus paperwork. The deadline to file still remains April 15.
If you're worried that the extra boost you got from the stimulus checks will count as taxable income, you need not worry. However, the stimulus money you're owed could change how much you get back in your refund. Here's what to know about your stimulus check and taxes.
Are stimulus checks taxable income?
Neither of the two previous stimulus checks delivered in 2020 are considered taxable, according to the Economic Impact Payment Information Center on the IRS website:
"...the Payment is not includible 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 income tax return."
The payment will also not impact your income level for purposes of determining eligibility for federal government assistance or benefit programs.
If you haven't received your stimulus money it will like come in the form of a tax credit, which means it will be wrapped up with your tax refund.
What if I haven't gotten last year's stimulus checks?
If you haven't gotten one or either of the stimulus checks from 2020, you'll have to file for a Recovery Rebate Credit when you do your taxes this year in order to get the money you are owed.
The Recovery Rebate Credit is a tax credit against your 2020 income tax. The IRS explains that taxpayers who claim this credit will either see an increase in their tax refund or a decrease in the amount of the taxes they owe.
Say, hypothetically, that you have a $2,000 tax bill this year but are still owed the full $1,800 from the two 2020 stimulus checks. You will only owe $200 due to the tax credit's offset.
Alternatively, if you expect to receive a tax refund, the total amount of your refund may be higher this year when stimulus money is factored in.
To get an idea of what to expect, refer to IRS Notice 1444 and IRS Notice 1444-B. These are the letters you should have received in the mail detailing the amount of your Economic Impact Payment.
How to best use your stimulus money
If you've been waiting for your stimulus check for this long, you might already have plans for your tax refund. Taking care of overdue bills, high-interest credit card balances and immediate needs like food and shelter should be your first priority when deciding what to do with the money.
But if you have all your basic needs covered and feel secure in your job, there are additional ways you might want to use your tax refund.
This could be a good time to start (or beef up) your emergency fund. A high-yield savings account that earns a better interest rate than the national 0.05% average could help you stretch your money a little further and save more for future needs.
The Vio Bank High Yield Online Savings Account offers one of the highest APY rates for high-yield savings accounts right now (APYs can go up and down). There is a minimum $100 deposit required to open an account, which is low enough that you could use a portion of your tax refund and still have money left over for other expenses.
There are no monthly charges to open a Vio savings account, as long as you opt to go paperless. (Otherwise, there's a $5 monthly fee for anyone receiving paper billing.)
Vio Bank Online Savings Account
Annual Percentage Yield (APY)
1.10%
Minimum balance
$100 to open
Monthly fee
None, if you opt for paperless statements (otherwise, $5 per month)
Maximum transactions
Up to 6 free withdrawals or transfers per statement cycle *The 6/statement cycle withdrawal limit is waived during the coronavirus outbreak under Regulation D
Excessive transactions fee
$10 per transaction
Overdraft fees
N/A
Offer checking account?
No
Offer ATM card?
No
Terms apply.
Vio does charge a $5 dormant account fee if you let your savings go 12 months without any transactions. The best way to avoid this is to use your stimulus to open the account, then set up a monthly recurring deposit from your checking account.
It's a win-win: Behavioral experts argue that automated transfers are the easiest way to prioritize saving. 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 contributions over time.
For other options with no fees whatsoever, check out CNBC Select's list of best high-yield savings accounts.
