Most Social Security beneficiaries this year received a financial windfall in the form of their COVID-19 stimulus check.
If you’re one of the many people who received one, you may be wondering how the extra money will affect any taxes that you may owe on your Social Security benefits in 2020.
Here’s what you need to know.
Will your coronavirus stimulus check mean you have a big IRS bill next year?
Social Security retirement, survivor, and disability benefits become taxable only when your countable income hits a certain threshold. Countable income includes one half of your Social Security benefits along with other income you’re taxed on, such as income from interest, dividends, and wages.
Once your countable income hits $25,000 as a single tax filer or $32,000 in combined household income as a married tax filer, you’ll be subject to tax on up to half your benefits. And if your income goes above $34,000 as a single filer, or if your combined income exceeds $44,000 as a married tax filer, up to 85% of your benefits will be subject to tax.
If you’re near these thresholds, you may be worried your stimulus check money will push you over the edge and either make some of your benefits subject to tax if they weren’t before, or make more of your benefits taxable because your household income is higher than it was before.
The good news is, however, that the coronavirus stimulus money was an advance on a tax credit. And, while most people got the money from the tax credit now instead of when filing 2020 tax returns next year, it’s still treated just like any other tax credit in that it is not considered to be countable income or even considered income at all.
That means that not only will your COVID-19 stimulus money not affect whether your Social Security benefits are taxable or the amount of tax you pay on them, but you also won’t pay ordinary income tax on the money either.
And for recipients of Supplemental Security Income (SSI), these benefits are never taxed. But you should know the coronavirus stimulus money also does not count as income when determining eligibility for these means-tested benefits. SSI beneficiaries are also subject to resource limits that impact eligibility, but the money from the COVID-19 payment will be excluded when determining your continued eligibility for up to 12 months.
Make sure to use your stimulus check wisely
Since you get to keep the entire amount of your COVID-19 money without worrying about owing taxes on it, you have the flexibility to do what you want, or need, to do with it.
For most people, the best option — if you don’t need to pay bills with it — is to save it for emergencies or invest it to grow your wealth. Since there’s a good chance it will be the only stimulus check you get, take the time to make the choice that’s right for you.
— Christy Bieber
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Source: The Motley Fool