Changes in tax laws due to the American Rescue Plan mean that some Americans will receive a refund for the unemployment taxes they paid. The economic stimulus package passed in March allows for a portion of unemployment income to be tax-free. Those who had already filed 2020 tax returns will be eligible for refunds on that amount.
The IRS said that unemployment tax refunds will start going out to taxpayers in May and continue throughout the summer months. For many people, the agency will calculate the refunds automatically, with no additional steps required by the taxpayer.
When will the refunds start?
Be aware that the IRS will start issuing refunds for individual tax filers eligible for the $10,200 exemption. After the IRS has processed the adjustments for those tax returns, it will move on to taxes filed by married couples filing jointly who are eligible for up to the $20,400 exclusion. The second wave of recalculations will also include more complicated tax returns.
Why unemployment taxes are being refunded
The Bureau of Labor Statistics reported that 23 million Americans filed for unemployment due to the COVID-19 pandemic in 2020.
Usually, unemployment income is considered taxable income by the IRS. Some people filed 2020 tax returns before the American Rescue Plan passed in March, so their calculations were based on prior law.
Now, the IRS is allowing a $10,200 exemption of unemployment benefits for 2020. Any individual filing taxes who received unemployment can deduct up to $10,200 of that from their taxable income. The change is applicable to taxpayers who earned less than $150,000 in modified adjusted gross income.
The amount of tax-exempt unemployment income is $10,200 per individual. For a married couple filing jointly, if they both received unemployment benefits in 2020, they could deduct a total of $20,400 of those benefits from their taxable income.
Do I need to file an amended return?
In many cases, you shouldn't need to file an amended tax return. The IRS will automatically make adjustments to tax returns for those whose information is already included in their original tax return.
The IRS said, “Taxpayers only need to file an amended return if the recalculations make them newly eligible for additional federal tax credits or deductions not already included on their original tax return.”
For example, if you already claimed the Earned Income Tax Credit (EITC), you don’t need to take any steps. The IRS will recalculate the amount of your return if the exclusion changed your income level.
However, if you didn't claim the EITC or other tax credits that you are now eligible for due to the tax law change, you will need to file an amended tax return. There’s an EITC Assistant tool on the IRS website to help you determine whether you qualify for the credit based on the unemployment tax exemption.
If the IRS determines that you are eligible for a refund on taxes you paid on unemployment, it will automatically issue you a check or apply the amount to any taxes owed.