Many readers are anticipating the stimulus checks that are expected to begin arriving in bank accounts in the next few weeks. The $1,200 for most taxpayers is welcome relief for the current financial crisis. But it is important to note that the money isn’t free.

The stimulus checks are officially a credit for 2020 taxes. In addition to the standard credits – like dependents, or head of households that taxpayers use to lower their taxable income – the stimulus checks are an additional credit used to offset 2020 taxable income.

So, what does that mean?

It means that when the taxpayer files their 2020 tax return, in addition to the standard deductions there is the additional 2020 stimulus deduction. The checks that taxpayers will be getting is an advance on the deduction.

When it comes time to file the 2020 tax returns, taxpayers will find that any refund money they were expecting will be reduced by the amount of the stimulus checks. For example, if the taxpayer expects a refund of $2,881 (the national average) then the amount that the taxpayer will receive will be $1,681.

That is the difference between the expected refund and the money that was advanced to the taxpayer in the form of the stimulus check.

This also means that the stimulus checks will not be taxable.

However, it is not expected that any overages paid to the taxpayer will have to be paid back to the IRS. For example, if the taxpayer does not owe any federal income tax then it is not expected that the taxpayer will have to pay back the money they received. That may change later in the year but it is highly improbable.

The stimulus checks are needed to be sure, but it is important that taxpayers understand where the money is coming from. For most taxpayers, it is just their own money the government is advancing to them.

Martin Paredes

Martín Paredes is a Mexican immigrant who built his business on the U.S.-Mexican border. As an immigrant, Martín brings the perspective of someone who sees México as a native through the experience...