What Is a Stimulus Check? Definition, How It Works, and Criticism

Stimulus Check

Investopedia / Sydney Burns

What Is a Stimulus Check?

A stimulus check is a payment made to a taxpayer by the U.S. government. Stimulus checks are made by paper check or through direct deposit. They are intended to encourage spending during times of economic and, thus, give the economy a boost. Stimulus checks can be part of a larger federal stimulus package designed to support the economy, which was the case with the stimulus payments that were part of the CARES Act in 2020 and the American Rescue Plan in 2021.

Key Takeaways

  • Stimulus checks are payments sent by the government to taxpayers to boost their spending power and spur economic activity.
  • Stimulus checks are either mailed to taxpayers, deposited into their bank accounts, or applied as tax credits to lower their tax bills.
  • The government sets eligibility requirements for stimulus checks, which means not everyone is entitled to receive them.
  • Stimulus checks were used during the Great Recession of 2008.
  • Between March 2020 and March 2021, the U.S. government sent Americans three rounds of stimulus payments to provide relief for economic hardships caused by COVID-19.

Understanding Stimulus Checks

Stimulus checks are direct payments made by the government to individuals during times of economic distress. People can opt to receive a paper check or have their stimulus payment deposited directly into their bank accounts. They are meant to boost consumer confidence and encourage spending by going to taxpayers who, in turn, would use them to drive revenue at retailers and manufacturers. As such, they are meant to spur the economy.

Not everyone qualifies for a stimulus check, which means there are general eligibility requirements in order to receive one. For instance, U.S. citizens and residents qualify as long as they are not claimed as dependents on anyone else's tax returns. The government may also impose income thresholds based on the tax filing status of individuals so if a single filer's adjusted gross income (AGI) is too high, they don't qualify.

These checks have been used to boost the economy on several occasions in the United States. They vary in amount according to the taxpayer's filing status. Joint taxpayers generally receive twice as much as single taxpayers. In some instances, those who with unpaid back taxes saw their stimulus checks automatically applied to their outstanding balance.

Research posted on the National Bureau of Economic Research (NBER) found that the means of delivery of fiscal stimulus makes a difference to the overall spending patterns of consumers. Implementing fiscal stimulus by sending checks resulted in an increase in consumer spending activity. However, applying tax credits equal to the amount of money provided in a stimulus check did not result in an equivalent increase in consumer spending activity.

Don't confuse stimulus checks with tax credits. While stimulus checks are payments made directly to individuals to provide them with immediate relief, tax credits lower your tax bill at the end of the year.

Special Considerations

Do stimulus programs work to help pull the economy out of a tailspin? In 2011, The Washington Post reviewed a series of studies that looked at the impact the American Recovery and Reinvestment Act (ARRA) of 2009 had on the economy. Out of nine studies, they found that six concluded that "the stimulus had a significant, positive effect on employment and growth, and three find that the effect was either quite small or impossible to detect."

The Congressional Budget Office found that the stimulus provided by the ARRA created between 1.6 million and 4.6 million jobs by 2011, increased real gross domestic product (GDP) by between 1.1% and 3.1%, and reduced unemployment by between 0.6 percentage points and 1.8 percentage points. It's important to note that unlike the Economic Stimulus Act of 2008, the ARRA did not include direct stimulus check payments to Americans.

Instead, according to the CBO, the full stimulus package worked by:

Providing funds to states and localities—for example, by raising federal matching rates under Medicaid, providing aid for education, and increasing financial support for some transportation projects. Supporting people in need—such as by extending and expanding unemployment benefits and increasing benefits under the Supplemental Nutrition Assistance Program (formerly the Food Stamp program), and purchasing goods and services—for instance, by funding construction and other investment activities that could take several years to complete; and providing temporary tax relief for individuals and businesses—such as by raising exemption amounts for the alternative minimum tax, adding a new Making Work Pay tax credit, and creating enhanced deductions for depreciation of business equipment.

Criticism of Stimulus Checks

Critics contend that the stimulus added some $1 trillion to the deficit and simply shifted economic activity that would have happened anyway. A Mercatus study pointed to unemployment rates, which rose even after the stimulus was implemented, as proof that stimulus checks were ineffective during the 2008 recession.

According to the study, the median duration of unemployment reached a high of 25.5 weeks in June 2010, after averaging 7.2 weeks from 1967 to 2008. Others, like American economist Paul Krugman, have contended that the stimulus amount was too small to be effective.

Examples of Stimulus Checks

As noted above, the government issued stimulus checks several times during times of economic turmoil. The following are two of the most recent periods during which taxpayers received stimulus checks.

COVID-19 Pandemic

In March 2020, the U.S. government approved a bill to send Americans stimulus payments to provide relief for economic hardships caused by the coronavirus pandemic. Among other provisions, the CARES Act specified tax rebates of $1,200 per adult and $500 per qualifying child. The amount of the rebate phases out for incomes above $75,000 per year for individuals and $150,000 for joint filers.

The second round of $600 stimulus checks went out in December 2020. Then, in March 2021, the American Rescue Plan Act was signed. It included direct stimulus payments of $1,400 to people making $75,000 or less per year.

A number of states either passed or are considering sending additional stimulus checks to residents in response to the COVID-19 pandemic. They include California, Colorado, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Maine, Minnesota, New Jersey, New Mexico, Oregon, Rhode Island, South Carolina, and Virginia.

Financial Crisis of 2008

One example of the use of stimulus checks occurred when the U.S. economy entered a severe recession after the financial crisis of 2008. The incoming Obama administration estimated that sending out checks would prevent unemployment rates from going beyond 8%.

The payments were part of the Economic Stimulus Act of 2008, which was enacted during the administration of President George W. Bush. The government sent out checks to those with at least $3,000 in qualifying income from, or in combination with, Social Security benefits, Veterans Affairs benefits, Railroad Retirement benefits, and earned income. The checks amounted to:

  • Eligible Individuals: Between $300 and $600
  • Married Taxpayers Filing Jointly: Between $600 and $1,200
  • With Eligible Children: An additional $300 for each qualifying child

What Is the Purpose of a Stimulus Check?

A stimulus check is a direct payment made via paper check or direct deposit to individual taxpayers. The payment is made by the U.S. government to qualifying individuals during times of economic distress to spur the economy. The government makes these payments to boost consumer confidence and encourage spending. The hope is that people will spend that money and increase revenue for retailers and manufacturers.

Who Qualifies for Stimulus Checks?

Not everyone qualifies for a stimulus check. The government normally sets eligibility requirements for each direct payment made. Recipients must be U.S. citizens or residents and they cannot be dependents who are claimed on anyone else's tax return. The government may also impose income thresholds based on individual tax filing statuses. This means that single filers with and adjusted gross income over a certain amount don't qualify. The same rule applies to married couples filing jointly or separately, heads of households, and widowed individuals.

What's the Difference Between Stimulus Checks and Tax Credits?

Stimulus checks are payments made by the government to individuals. These payments are meant to immediately spur economic activity by putting money directly into the pockets of taxpayers when the economy is going through a downturn. The idea is that these payments boost consumer confidence and encourage spending. Tax credits, on the other hand, are used to lower an individual's annual tax liability. As such, they reduce the actual amount of tax owed at the end of the year.

Where Is My Stimulus Check?

You can see what economic impact payments were issued to you by accessing your Internal revenue Service (IRS) account on the agency's Your Online Account portal. You can also use this service to view your tax history, make payments, or make payment arrangements. You'll need your Social Security number (SSN) and other information to verify your identity.

The Bottom Line

Consumers tend to lose confidence in their economic power during times of crisis. That's because the value of a dollar isn't nearly as high as when the economy flourishes. When things get thrown into a big spiral, the government may step in to help boost consumer confidence. This can come in the form of stimulus checks. These one-time payments are meant to encourage people to spend and spur growth in the economy. This was the case in the U.S. during the COVID-19 pandemic. If you didn't get a stimulus check, don't fret. The IRS allows individuals to claim a tax credit to lower their tax liability.

Article Sources
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  1. National Bureau of Economic Research. "The Effectiveness of Fiscal Stimulus Depends on How It Is Delivered."

  2. The Washington Post. "Did the Stimulus Work? A Review of the Nine Best Studies on the Subject."

  3. Congressional Budget Office. "Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output from January 2011 Through March 2011," Page 2.

  4. Congressional Budget Office. "Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output from January 2011 Through March 2011," Page 1.

  5. Mercatus.org. "The U.S. Experience With Fiscal Stimulus: A Historical and Statistical Analysis of U.S. Fiscal Stimulus Activity, 1953-2011."

  6. The New York Times. "How Did We Know The Stimulus Was Too Small?"

  7. Congress.gov. "S.3548 - CARES Act."

  8. Congress.gov. "H.R. 133 - Consolidated Appropriations Act (CAA) 2021."

  9. Congress.gov. "H.R.1319 - American Rescue Plan Act of 2021."

  10. Forbes. "These 17 States Are Sending Out Stimulus Checks—Is Yours Next?"

  11. Christina Romer and Jared Bernstein. "The Job Impact of the American Recovery and Reinvestment Plan (Archived)," Page 4.

  12. Congress.gov. "H.R.5140 - Economic Stimulus Act of 2008."

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