The Internal Revenue Service is starting to provide tax refunds to taxpayers who paid taxes on their unemployment benefits for 2020 that were recently later excluded from taxable income.
In March, following the passage of the American Rescue Plan Act, the IRS said it would recalculate taxes and return the money starting in May for all taxpayers who filed and paid taxes early on their 2020 unemployment benefit prior to the bill’s passage . The IRS urged tax professionals not to file amended tax returns for these clients and instead wait for the IRS to return the funds this spring and summer.
The announcement came over the last weekend of yet another extended and confusing tax season for taxpayers and preparers due to the ongoing pandemic, recent tax law changes due to the various COVID-19 relief packages that Congress passed since last year, as well as arrears and staff shortages at the IRS.
A man wearing a protective mask rides a scooter past the Internal Revenue Service headquarters in Washington, DC
Samuel Corum / Bloomberg
“There have been many changes that our employees have had to deal with in the past few months,” said Stephen Henley, senior managing director and head of national tax practice at CBIZ MHM. “Last year was a big change as the pandemic got shut down and everyone moved to remote work and of course all the delays with the postponement of tax deadlines. That year we had the postponement from 1040 to May 17, but in addition we had the changes in legislation that were made at the end of the year, essentially making some retrospective changes to the retention tax credit. That tax credit was all but ignored and really wasn’t a big deal for many companies as they were getting the PPP loans. If you got the PPP, you couldn’t get the tax credit. Well, the legislation changed that retrospectively, and suddenly it was a big deal. And that right at the beginning of the tax season. We are of course still working on it for our customers. That’s an added complexity that is good for our customers and us, but it’s just another thing that we had to put on the list along with the PPP 2 loans and then the Restaurant Revitalization Grant process that we just launched. It was a challenge because of the various changes. “
The American Rescue Plan Act excludes 2020 unemployment benefits of $ 10,200 from income used to calculate the amount of tax owed. The $ 10,200 per person exclusion applies to taxpayers who are either single or married and jointly submit a modified gross adjusted income of less than $ 150,000. The $ 10,200 is the amount of exclusion of income, but not the amount of the refund. Refund amounts will vary and not all adjustments will result in a refund. The unemployment benefit remains taxable above this limit.
The IRS announced on Friday that it has identified more than 10 million taxpayers who filed their tax returns prior to the US bailout plan going into effect and has reviewed those returns to determine the correct taxable amount for unemployment benefits and taxes. This may result in a refund, reduced balance, or no change in tax (no refund due or amount owed).
“These corrections will be made automatically, incrementally, which will relieve taxpayers,” the IRS said. “The first phase is underway and involves the simplest returns. The next phase will include the more complex tax returns, which the IRS is expected to take by the end of the summer to review and correct. “
The first phase of adjustments takes place for individual taxpayers who have had the simplest of tax returns, including those filed by taxpayers who did not apply for children or refundable tax credits. The IRS plans to provide direct deposit refunds to taxpayers who included their bank account information on their 2020 tax returns. However, if valid bank account information is not available, the refund will be sent as a check to the address provided, which will take longer and increase delays. The IRS said it will continue to send refunds until all identified tax returns have been reviewed and adjusted.
Refunds are subject to customary set-off rules, including overdue federal taxes, state income taxes, state unemployment compensation debts, child support payments, spousal benefits, or certain federal non-tax debt (i.e., student loans). The IRS said it would send a separate notice to the taxpayer when the tax refund is being used to pay off those outstanding debts.
The IRS will also send taxpayers a notice explaining the corrections. You should receive notification within 30 days of the correction. The IRS advised taxpayers to keep any notices they receive for their records. You should also review your return after receiving an IRS notice.
The American Rescue Plan Act also contained provisions that expand the applicability of the Earned Income Tax Credit to individual taxpayers. As part of the same process, the IRS also corrects any claims for the Earned Income Tax Credit for Individuals Without Qualified Children and the Refund Credit, which is used to claim funds from economic impact payments that a taxpayer did not receive last year. However, the IRS noted that some taxpayers may be eligible for certain income-related tax credits that are not claimed on their original tax return, such as: B. the EITC for their qualified children. In this case, taxpayers were advised to file an amended tax return if they received additional benefits based on the revised Adjusted Gross Income.
After the IRS completes this first phase for simpler tax returns, more complex corrections begin, such as: B. for married couples who submit together.
The American Rescue Plan Act also overrides the obligation to repay excess Premium Tax Credit (APTC) prepayments. “If a taxpayer paid an APTC refund amount when filing their 2020 tax return, the IRS will automatically reimburse that amount,” the IRS said. “If the IRS adjusts the taxpayer’s account to reflect the unemployment income exclusion, the APTC excess amount paid by the taxpayer will be included in that adjustment. The IRS is also adjusting accounts for those who paid off excess APTC but did not include unemployment benefits on their 2020 tax returns. “
Taxpayers who have not yet filed a tax return should consult the guidance on Forms 1040 and 1040-SR, which explains how to exclude unemployment benefits.
All in all, many tax professionals will be happy to see the end of this long, prolonged and stressful tax season
“One of the things that happens when you have an extended deadline like this is that it seems to slow down once you get the right data for the tax filing process,” Henley said. “It seems that every year it becomes more difficult to collect customer data quickly. Of course, if you don’t get the client data, it will disrupt your workflow. You have things planned and you can’t do them, and you have to make things happen. “
He hopes the rest of the year and the next tax season will be less difficult. “It’s been a challenge when you have these shifting deadlines and hopefully this is the last year we have to deal with it but of course we don’t know what’s going to happen in the future,” said Henley. “But I hope that after this year we will get a sense of normalcy.”