If you received unemployment benefits last year and filed your 2020 tax return relatively early, you may soon find a check in your mailbox (or a deposit in your bank account). Starting in mid-May and well into the summer, the IRS will automatically issue tax refunds to those Americans who filed their 2020 statement and reported unemployment benefits before the American Rescue Plan made changes to the tax law.
The American Rescue Plan, signed on March 11, exempts US $ 10,200 from federal tax (US $ 20,400 for jointly submitted couples) from unemployment benefits through 2020 for households reporting an Adjusted Gross Income (AGI) of less than US $ 150,000. The IRS has identified over 10 million people who filed their tax returns before the plan went into effect and are reviewing those returns to determine the correct tax amount for their unemployment benefit. For those affected, this may result in a refund, a reduced tax burden or no change. (You can use the IRS’s Interactive Tax Assistant tool to determine if payments you received for your unemployment are taxable.)
The IRS will recalculate the affected tax returns in two phases. It starts with tax returns for individual taxpayers who have had the simplest tax returns, e.g. B. from those who have not claimed children as dependents or recoverable tax credits. It then adjusts the returns for married couples filing together who are eligible for an exemption of up to $ 20,400, as well as other couples with more complex returns.
The new tax exemption only applies to unemployment benefits received in 2020. So if you get unemployment benefits in 2021 or beyond, expect to pay federal tax on the amount you get.
Just because the federal government is waiving the first $ 10,200 of your 2020 unemployment benefit doesn’t mean your state will. To find out if your state has accepted the 2020 tax exemption, see Unemployment Benefit Taxes: A State-by-State Guide.
Reimbursements for unemployment benefits
If you are eligible for a refund, it will be deposited directly into your bank account by the IRS if you have provided the required bank account information on your 2020 tax return. If valid bank account information is not available, the IRS will send a paper check to your address. The IRS says it will continue to send refunds until all identified tax returns have been reviewed and adjusted.
The IRS will send you a note explaining any corrections. Expect to be notified within 30 days of the correction. Keep any notifications you receive for your records and review your return after receiving an IRS notification.
Refunds are also subject to normal clearing rules. So the amount you receive could be reduced (possibly to zero) if you owe federal tax, state income tax, state debt for unemployment benefits, child benefit, spouse’s allowance, or certain federal non-tax debt (i.e. student loans). The IRS will send you a separate notice if your refund is being used to settle unpaid debts.
Should I submit a modified return?
Although the IRS says there is no need to file an amended tax return, some early filers may still need to do so, especially if their recalculated AGI entitles them to additional federal credits and deductions not already on their original tax return.
For example, the IRS may adjust the tax returns for those taxpayers who applied for the Earned Income Tax Credit and may now receive an increase in the tax credit amount due to the change in their income levels, which may result in a larger refund. However, taxpayers will have to file an amended tax return if they didn’t originally apply for a tax credit or other credits but are now eligible because the exclusion changed their income, the IRS said. These taxpayers may also want to review their state tax returns.
Withholding unemployment benefits
Again, the $ 10,200 exemption only applies to unemployment benefits received in 2020. To avoid a heavy tax burden when filing your 2021 tax return next year, consider withholding tax from any unemployment benefits you receive that year.
Contact your state employment office to have federal income tax withheld from your unemployment benefit. You may be able to use Form W-4V to voluntarily withhold federal income tax from your payments. However, check with your state to see if they have their own form. If so, use the status form instead.
Excess premium tax credits
The American Rescue Plan also suspends the obligation to repay excess prepayments from the tax credit. If you paid off any excess balance when you submitted your 2020 return, the IRS will automatically refund that amount. If the IRS corrects your return to reflect the unemployment benefit exclusion, any excess tax credit you pay will be included in the adjustment. The IRS is also adjusting tax returns for those who have paid back excess premium tax credits but did not include unemployment benefit on their 2020 tax returns.