Most Americans are happy to get money from the government, whether it comes in the form of a stimulus check or a tax cut. However, not everyone understands how these two forms of relief work and whether one is ultimately better than the other.
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We spoke with financial experts who explained how both forms of relief can put more money back in consumers’ bank accounts, but how much relief can depend on a variety of factors.
Find out which one confers better benefits over the long haul.
Americans may recall that during the economic slump that occurred with the COVID-19 pandemic’s lockdown period, the federal government sent out three rounds of stimulus checks to offer relief. Stimulus checks typically must be approved by an act of Congress, passed as part of a bill and usually come in a lump sum payment, according to Curt Scott, president and investment advisor representative at Scott Financial Group.
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Tax cuts also must be passed as part of a bill by Congress. They typically show up as slightly higher take-home pay throughout the year or result in the taxpayer owing less — or receiving a larger refund — when you file your taxes, Scott explained.
Though tax cuts are valuable, they often don’t show their full impact until the year’s end or the end of a tax season whereas stimulus checks provide quicker and more immediate relief for middle- and lower-income people, added Kevin Connor, CEO of Modern SBC.
“These checks offer a sum of cash that can be used right away, for rent, bills or other urgent needs,” Connor said.
Timing plays a key difference in how stimulus checks and tax cuts work, as well. Stimulus checks give instantaneous relief, while tax cuts provide long-term and incremental relief, Connor pointed out.
“Tax cuts are typically ongoing and reduce the amount an individual owes each year, stimulus checks are a one-time, infusion of cash directly into the wallets of consumers,” he said.
While both offer a kind of relief, Scott pointed out that it’s common for stimulus checks to exclude high earners and be more focused on the middle-, lower- or no-income households. “If a household doesn’t have earned income or very little, a tax cut may not benefit them the way a stimulus check would.”
However, for middle- and lower-income households, especially with expanded credits, tax cuts can still add up over time, Connor said.
Both can have a tremendous impact on consumer spending and the economy. “Stimulus checks will give both a quick boost that could fade rather quickly, while tax cuts will have a smaller initial impact but the benefits can last much longer,” Scott said.
There are some downsides to both, however, Scott explained. While they represent more money being given to the public, which needs to come from somewhere, stimulus checks can raise the country’s debt, and that will need to eventually be paid back by increased taxes or reduced expenditures.
“Tax cuts don’t directly result in debt, but they will lead to less revenue which could cause spending cuts to government spending or deficient spending that would increase debt.”
Additionally, tax cuts can’t be used as a substitute for addressing systemic financial issues (like affordable healthcare or education), Connor pointed out, because they can fail to create sustainable financial security.
“On the other hand, the biggest risk with stimulus payments is that they’re temporary. Once the money is spent, people are usually left without a long-term financial backup. Both solutions have their place but should not be seen as long-term solutions.”
Scott falls on the side of tax cuts over stimulus checks as being more effective for building financial stability. They can be used in monthly budgeting and investment strategies for an extended time.
Connor agreed, adding, “Tax cuts are mostly better when looking at long-term financial stability.”
“In times of immediate financial hardship, stimulus checks can be the bridge that gets the American people from a tough situation to a better situation,” Scott said.
They just don’t offer the sustained benefit that tax cuts can provide, Connor said.
If you do get a stimulus check in the future, Scott said they’re an effective way to build an emergency fund, pay off high interest debt or buy essentials in a time of financial need.
Either way, should you receive a future stimulus or get the benefit of a tax cut, the best way to maximize these savings is to make sure you’re making smart financial decisions.
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This article originally appeared on GOBankingRates.com: Stimulus Checks vs. Tax Cuts: Which Puts More Money in Your Pocket?