Those who have received unemployment benefits during 2020 but filed taxes before Congress voted to make $10,200 of that money tax-free will be getting a refund within the next few weeks, according to the IRS.
The refund will be automatic, meaning the IRS will review returns of those who received unemployment benefits and filed their return before the law that authorized the tax-free benefit went into effect. The taxpayer does not have to do anything to get that refund.
While the IRS is reminding those who received the benefits that they must pay taxes on the income, the American Rescue Act, which passed in March, excludes up to $10,200 ($20,400 if married filing jointly) of that income from being taxed. The amount above $10,200 is subject to taxes.
According to the IRS, “unemployment benefit recipients should have received a Form 1099-G, Certain Government Payments, from the agency paying the benefits. The form will show the amount of unemployment compensation they received in 2020 in Box 1, and any federal income tax withheld in Box 4.”
The legislation allows taxpayers who earned less than $150,000 in adjusted gross income to exclude unemployment compensation up to $20,400 if married and filing jointly, or $10,200 for all other eligible taxpayers.
Since the $10,200 exemption was not passed into law until March, many may have already filed their 2020 income return without being able to get the exemption.
So what if you filed your income tax return before the passage of the bill?
“The IRS will recompute any credits and deductions claimed on the original return,” the IRS website explains.
One consequence of the exemption is that it may make some eligible for an Earned Income Tax Credit. The credit lowers the amount of taxes a person owes.
If a person falls into that category, they will have to file an amended return to get the additional money. The IRS will not automatically amend their return and issue a refund.
“For example, the IRS can adjust returns for those taxpayers who claimed the Earned Income Tax Credit (EITC) and, because the exclusion changed the income level, may now be eligible for an increase in the EITC amount which may result in a larger refund,” the IRS said. “However, taxpayers would have to file an amended return if they did not originally claim the EITC or other credits but now are eligible because the exclusion changed their income.”
If you have not yet filed your return, tax software has been updated to reflect the changes with unemployment benefits, the IRS said.
Taxpayers can see if they qualify for the EITC at IRS.gov.
The IRS announced on March 31 that the first of the amended payments were expected to go out in May, though an exact date has not been specified.