If you received any stimulus check or got a direct deposit of economic impact payments (EIP ) or through a stimulus EIP Debit card, a question may hover if the payment will actually increase your tax or reduce your expected tax refunds during the year 2021. The plain and simple answer to that question is that stimulus payments are tax-free. So, it does not form part of your taxable income for the year 2020 (filing tax return in 2021). Therefore, the EIP is not adjusted against any refund out of your tax return for the year 2020.
Receipt of stimulus payment does not increase your total income, thus, it also does not affect the tax bracket you fall for the tax year 2020
What about the recovery rebate credit?
The stimulus payment – both first stimulus payment under the CARES Act and the second round of payments under the COVID-related Tax Relief Act of 2020- are treated as advance payments shall be adjusted against the eligible amount of recovery rebate credit. So, if you have already received the full amount of stimulus amounts -both first & second round- you will not receive any tax credit as recovery rebate credit. If you have not received stimulus payment or received less than what you are eligible for, you will get recovery rebate credit.
Will stimulus payment affect my state tax refunds?
The economic impact payments are by the Federal government and the state government has nothing to do with it. It will not affect your state tax refunds at all. You will also not get recovery rebate credit against state tax liability.
If stimulus payment is an advance , should we payback it in year 2021?
Though Stimulus payments are advance payment, it is not returnable because Government has passed legislation by which advance payments are adjusted against the recovery rebate credits. So, nobody who received his/her eligible amounts of stimulus check will have to return it. At best they don’t get recovery rebate credit. For more information on how much you were eligible for a stimulus payment, please read stimulus checks calculator.