Typically, unemployment insurance benefits are fully taxable for federal purposes. However, in the middle of the tax filing season, as part of the American Rescue Plan Act, Congress decided that each individual who received unemployment benefits could exclude the first $10,200. This would include those benefits from taxation if their modified AGI were less than $150,000.
This created a problem since the exclusion had been announced after millions of taxpayers had filed their tax returns. Not wanting to deal with amended returns from all those early filers, the IRS announced they would automatically make the adjustment and send out the appropriate refunds. Furthermore, the IRS also cautioned taxpayers not to file amended returns since the Service would be adjusting.
If you are a 2020 unemployment benefits recipient who filed early and have been waiting for a refund, the IRS has announced it will begin issuing refunds on May 15, 2021. The IRS plans to adjust the simplest returns first, which are those filed by unmarried taxpayers, followed by the returns of married taxpayers. The IRS estimates it will take through the end of summer to review and correct all of the returns.
The IRS will issue refunds by direct deposit from taxpayer included bank account information on their 2020 tax return. Otherwise, the refund will be by check mailed to the taxpayer’s address of record.
The IRS will send taxpayers a notice explaining the corrections, which they should expect within thirty days of when the correction is made. You are strongly advised to retain the notice and forward it to this office. The IRS concedes and may not pick up all the adjustments made possible by the reduced income as discussed below.
Refunds will be subject to standard offset rules, such as past-due federal tax, state income tax, state unemployment compensation debts, child support, spousal support, or certain federal nontax debts (i.e., student loans). In addition, the IRS will send a separate notice to the taxpayer if the refund is offset to pay unpaid debts.
The IRS has indicated the adjustments they will make include the Earned Income Tax Credit (EITC) for taxpayers without qualifying children and the Recovery Rebate Credit. However, some taxpayers may be eligible for certain income-based tax credits not claimed on their original return. For example, it could be the EITC for their qualifying children, increased Premium Tax Credit, and other limitations based upon income. An
amended tax return can be filed after IRS revisions are made if the taxpayer(s) become eligible for additional benefits.
The American Rescue Plan Act also suspended the requirement to repay excess advance payments of the Premium Tax Credit (excess APTC). The suspension would be available to those who purchase their health insurance from a government marketplace. Suppose a taxpayer-paid an excess APTC repayment amount when they filed their 2020 return. In that case, the IRS will automatically refund that amount. Suppose the IRS corrects the taxpayer’s account to reflect the unemployment income exclusion. The taxpayer’s original return included an excess APTC amount that the taxpayer paid. In that case, the IRS will include that adjustment as well.
As always, please call this office if you have questions.