Learn About Stimulus Checks and Tax Credits

What Are Stimulus Checks and How Do They Work?

Stimulus checks are direct payments sent by the federal government to individual taxpayers during times of economic difficulty or crisis. The most well-known stimulus checks were distributed during the COVID-19 pandemic, when the U.S. government sent three rounds of payments to help people manage financial hardship. The first round, authorized in March 2020 under the CARES Act, sent up to $1,200 per adult. The second round in December 2020 provided up to $600 per person, and the third round in March 2021 sent up to $1,400 per individual.

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These payments work by the Treasury Department identifying individuals based on tax return information, Social Security benefits records, and other government databases. The checks may arrive via direct deposit to a bank account, a paper check in the mail, or a prepaid debit card called an Economic Impact Payment card. The government does not require repayment of stimulus checks—they are not loans but rather transfers of federal funds.

Stimulus checks target households across different income levels, though higher-income earners receive reduced amounts or nothing at all. A person earning $75,000 annually as a single filer received the full amount during the 2021 round, while someone earning $100,000 received a partial payment. Income thresholds vary depending on filing status—head of household filers have different cutoffs than single filers or married couples filing jointly.

The payments are distributed relatively quickly once legislation passes. The 2021 stimulus round, for example, began reaching bank accounts within days of the bill's signing. The IRS tracks the distribution through its "Get My Payment" tool, which allows people to see payment status and update deposit information if needed.

Practical takeaway: Understanding stimulus mechanics helps you recognize legitimate payment notices from government agencies and avoid scams that falsely claim to help you receive payments. Official government stimulus comes without fees or personal information requests beyond what the IRS already has on file.

Tax Credits That Reduce What You Owe or Increase Refunds

Tax credits are reductions in the amount of tax owed to the federal government. Unlike deductions, which reduce the income amount that is taxed, credits directly reduce your tax bill dollar-for-dollar. A $1,000 tax credit means you owe $1,000 less in taxes. Some credits are "refundable," meaning if the credit amount exceeds your tax liability, you receive the difference as a refund. Other credits are "non-refundable," meaning they can only reduce your tax bill to zero but cannot result in a refund.

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The Earned Income Tax Credit (EITC) is one of the largest tax credits, benefiting roughly 25 million working people and families annually. In 2023, the maximum credit reached $3,995 for people without children, $3,416 for one child, $5,672 for two children, and $6,935 for three or more children. The EITC targets lower and moderate-income workers. A single person earning $16,810 or less in 2023 could claim the credit without children, while parents with higher earnings may still qualify depending on income limits and number of children.

The Child Tax Credit provides up to $2,000 per child under age 17 for each year. This credit phases out for higher-income filers—single parents earning over $400,000 begin to lose the credit. The credit is partially refundable, meaning families can receive up to $1,700 per child as a refund if they owe little or no tax. During 2021-2022, this credit was temporarily expanded, and some payments were distributed monthly rather than only at tax time, providing advance payments to families.

Other notable credits include the Child and Dependent Care Credit (up to $3,000 in care expenses), the Retirement Savings Contributions Credit (up to $1,000 for lower-income savers), the American Opportunity Tax Credit for education (up to $2,500 per student), and the Lifetime Learning Credit (up to $2,000 per return). The Saver's Credit rewards lower-income workers who contribute to retirement accounts. These credits address different life circumstances and financial goals.

Practical takeaway: Review available tax credits based on your family composition, income, education expenses, and retirement savings to understand which ones may reduce your overall tax burden. The IRS provides worksheets and publications that guide calculation of each credit.

Income Limits and Phase-Out Rules You Should Know

Tax credits and stimulus payments operate under income limits that determine who receives the full benefit, a reduced benefit, or nothing. Income limits vary by filing status (single, head of household, married filing jointly, married filing separately, and qualifying widow or widower). For example, in 2023, the full Child Tax Credit applied to single filers with modified adjusted gross income (MAGI) up to $400,000, while married couples filing jointly had a limit of $800,000. Income above these thresholds results in a reduced credit—the reduction typically amounts to $50 for each $1,000 (or fraction thereof) of income above the threshold.

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The Earned Income Tax Credit operates differently, with phase-in and phase-out ranges. For a single filer with one child in 2023, the credit increased as income rose from $0 to approximately $23,191, reaching the maximum. Beyond this point, the credit decreased as income increased, eventually reaching zero at $50,162 in income. The phase-out range is crucial because a person earning $48,000 receives less credit than someone earning $40,000, even though the higher earner has more total income.

Understanding these phase-out rules matters for financial planning. A person near an income threshold might receive very different tax benefits based on small income changes. If self-employed, for instance, deductions that reduce income can sometimes trigger larger tax credits. However, some credits have multiple income measures—EITC uses earned income and MAGI, while others reference only MAGI or adjusted gross income (AGI).

During the pandemic stimulus rounds, phase-out rules determined payment amounts. For the 2021 stimulus payment, single filers with $75,000 income received the full $1,400, those earning between $75,000 and $80,000 received partial amounts, and those earning $80,000 or more received nothing. Head of household filers had a $112,500 phase-out threshold, and married filing jointly had $150,000. These thresholds were based on 2020 tax returns, with the option to update using 2021 returns if they showed lower income.

Practical takeaway: Calculate your Modified Adjusted Gross Income using IRS worksheets before assuming you fall within a credit's income range. Being slightly over a threshold may reduce but not eliminate benefits, so verify exact amounts rather than assuming zero benefit.

How to Claim Credits and Understand Your Tax Return

Claiming tax credits begins with choosing a tax filing method: paper forms, tax software, or a tax professional. The IRS Form 1040 is the main individual income tax return form. Taxpayers list income sources, deductions, and then credits on specific lines. Each credit has its own schedule or form. The Child Tax Credit uses Form 1040 Schedule 8812, the EITC uses Schedule EITC, and education credits use Form 8863. These supporting forms calculate the exact credit amount based on income, filing status, and dependent information.

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Tax software programs like TurboTax, H&R Block, and TaxAct guide users through questions about their situation and automatically populate the correct forms with answers. Free software is available through the IRS Free File program for people earning below certain thresholds—$79,000 in 2023. Free File software includes brand-name programs that can file federal returns at no cost. State returns may have separate fees. Many libraries and community organizations also offer free tax preparation assistance through programs like the Volunteer Income Tax Assistance (VITA) program.

Tax professionals—enrolled agents, Certified Public Accountants (CPAs), or tax attorneys—can prepare returns for a fee. They review income sources, expenses, and life changes to identify all available credits. The cost typically ranges from $150 to $500 depending on return complexity, though some professionals charge flat fees or hourly rates. Working with a professional may be worthwhile for business owners, those with investment income, or families with complex situations involving multiple income