Stimulus Payments & Taxes: Understanding Taxability of COVID Relief Funds

Whether you pay taxes on stimulus depends on the type of benefit.

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Key points

• Most sources of stimulus funds are non-taxable.
• The exception is unemployment benefits.

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Most of us have received pandemic-related assistance over the past two years. And as we push to get our 2021 returns filed, that leaves many of us asking if any of those funds are taxable. Are we going to receive a smaller refund, or worse yet, owe money?

Here, we look at the final stimulus checks, the $1,400 checks that began hitting bank accounts in March 2021. However, we also include other COVID-related financial assistance, including advanced Child Tax Credit payments, boosted unemployment benefits, and emergency SNAP benefits.

Stimulus checks

Last spring, millions of Americans received a stimulus check of up to $1,400. These stimulus funds are not taxed.

According to the IRS, "No, the Third Economic Impact Payment is not includible in your gross income. Therefore, you will not include the third payment in your taxable income on your 2021 Federal income tax return or pay income tax on the third payment."

Unfortunately, there seem to be some internet rumors swirling out there by people who believe that they are in fact being taxed on stimulus checks. If you come across any such inaccurate information, just ignore it.

Bottom line: If your tax bill is higher than usual this year, there's another reason for it. Stimulus checks are not taxable.

Advanced Child Tax Credit

Most American families with children received monthly advanced Child Tax Credits in 2021. These payments ranged from $250 to $300 each (depending on the child's age) and arrived in bank accounts around the country from July through December.

Like stimulus checks, Child Tax Credit payments are not taxable. If you find that your refund is less than normal this year, this may help explain why:

• In a "typical" year, you receive a $2,000 credit per eligible child. If you have three children, that's a $6,000 credit.
• Let's say your three children are ages 6, 8, and 10. Thanks to the American Rescue Plan, the total credit was increased to $3,000 per child. If you received $250 per month between July and December 2021, you've already received $1,500 of the $3,000 due ($250 x 6 = $1,500).
• You file for the other half of the Child Tax Credit on your 2021 tax return. In other words, you file for a $1,500 credit per child rather than the $2,000 for which you would normally file. So, instead of receiving a $6,000 credit this year, the most you receive is $4,500.
• While it may appear as though you're being "shorted," you're actually money ahead. In an average year, you would have received $6,000 for three eligible children. Because of the advanced Child Tax Credit, you'll receive $9,000 -- just not as much as normal at tax time.

Bottom line: If you receive a smaller refund, it may be due to receiving part of the Child Tax Credit in advance. You pay no taxes on advanced Child Tax Credits.

Boosted unemployment

For the 2020 tax year, Congress waived federal taxes on the first $10,200 of unemployment benefits. The same is not true for the 2021 tax year.

Around 25 million people applied for jobless benefits in 2021. All 25 million must pay federal taxes on those benefits (as usual). Whether or not you'll owe state taxes on unemployment benefits depends on the state in which you live.

The states below either are subject to no state income tax, exempt unemployment benefits from their state taxes, or only tax a portion of unemployment benefits. Make sure you understand the rules in your state.

State tax category	State
States that have no income taxes	Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming
States that exempt unemployment benefits at tax time	Alabama, California, Montana, New Jersey, Pennsylvania, and Virginia
States that tax a portion of unemployment benefits	Indiana and Wisconsin

Data source: Tax Outreach

If you received unemployment benefits in 2021, you should have already received a Form 1099-G showing how much you received and how much was withheld for taxes.

Learning that taxes are due can be unpleasant, made worse if you're not working or have only recently gone back to work. If your tax bill is too much to pay right now, apply with the IRS to pay the balance in monthly installments. An installment agreement is available online through the IRS website.

Bottom line: If you received unemployment benefits in 2021, federal taxes are due on those funds. Whether or not you must pay state taxes depends on the state in which you live.

SNAP, P-EBT, and TANF benefits

Following the outbreak of COVID-19, the USDA granted state waivers allowing for emergency Supplemental Nutrition Assistance Program (SNAP) allotments. And in 2021, Congress extended Pandemic Electronic Benefit Transfer (P-EBT) -- a program designed to ensure that children from struggling families receive the nutrition they need. In addition, low-income families had access to the Temporary Assistance for Needy Families (TANF) program. These benefits fall under the non-taxable category.

Bottom line: SNAP, P-EBT, and TANF benefits are not taxable.

If you find that you owe more than expected or receive a smaller refund than you hoped for, take a second look at your taxes. Make sure none of the non-taxable benefits are included as income.