Did You Claim Unemployment Benefits Prior to the American Rescue Plan?
2020 was a tough year financially and many taxpayers had to rely on unemployment to make it through. The IRS is helping taxpayers by automatically refunding money to people who reported unemployment on their taxes before the changes made by the American Rescue Plan went into effect.
The American Rescue Plan was signed on March 11, 2021 and allows taxpayers who earned under $150,000 in adjusted gross income to exclude 2020 unemployment compensation up to $20,400 if filing jointly and $10,200 for all other taxpayers. Since the legislation went into effect after many people already filed their taxes, the IRS will be providing refunds to those individuals. Refunds will begin going out in May and will continue to be delivered throughout the summer.
The IRS will be reviewing taxes filed for individuals who received unemployment to determine the amount that should be deducted from their income. Any overpayment will be refunded or applied to outstanding balances owed to the agency.
The recalculations will occur in two phases. The IRS will initially be focusing on those eligible for the $10,200 exclusion and then they will be processing refunds for the $20,400 exclusion. Those with more complex returns will also be considered in the second phase.
Taxpayers will not have to make changes on taxes previously filed. The refund will be automatically applied for all individuals who meet the requirements. However, if the new calculations make the taxpayer eligible for additional federal credits and deductions that were not claimed on the original filing, taxes may need to be updated.
For instance, taxpayers who claimed the Earned Income Tax Credit may have to amend their taxes if the exclusion changed their income. The newly considered unclaimed income would lower their income level and make them eligible for an increase in credit. This would also apply to taxpayers who did not claim EITC and may now be eligible as well as individuals eligible for other types o f credit.
According to the Bureau of Labor Statistics, more than 23 million American workers filed for unemployment in 2020 including some self-employed workers. The IRS is working on figuring out how many of those workers filed taxes already and are now due a refund.
The IRS is also providing guidelines for eligible taxpayers who have not yet filed.
The agency has worked with tax prep software companies to reflect recent updates so people who file electronically will be able to take advantage or the exclusion when doing their taxes.If you are a taxpayer who has not yet filed and you want to be sure you are considered for the exclusion, see the New Exclusion of up to $10,200 of Unemployment Compensation link on the IRS web site. Instructions and an updated worksheet about the exclusions can also be found at IRS.gov/form1040.