The IRS says that starting next month, it will automatically send refunds to people who paid thousands of dollars of tax on unemployment income — money that they no longer owe.
Many people sought unemployment benefits for the first time in 2020 and didn’t realize their benefits were taxable. Others knew unemployment compensation would be taxed but, feeling the financial strain of paying for rent or buying foodfor their families, opted not to have the funds taken out.
But all that changed under the American Rescue Plan, signed into law on March 11. Congress removed the federal taxability of unemployment benefits up to $10,200 for individuals and $20,400 for married couples filing jointly. To get the tax break, your modified adjusted gross income has to be less than $150,000.
More than 23 million U.S. workers filed for unemployment last year, the IRS said, referring to data from the Labor Department.
This past week, the IRS finally confirmedhow it would handle refunds for people who had already filed their 2020 tax returns. People due money back will automatically be sent a refund. They won’t have to amend their returns, which is a good thing considering the backlog at the agency. The IRS is still processing returns and refunds from 2019. Including current-year returns, the agency says it had 9.2 million unprocessed returns in its pipeline as of March 5.
For those taxpayers who already have filed and paid taxes on the full amount of their unemployment benefits, the IRS said it will determine the correct taxable amount. “Any resulting overpayment of tax will be either refunded or applied to other outstanding taxes owed,” the agency said.
The first wave of refunds is expected in May. The distributions will continue into the summer, the agency said.
Some people may still need to file an amended return if the tax break on their unemployment benefits would make them eligible for certain federal credits and deductions once their taxable income is adjusted.
Here’s an example of what this means. Taxpayers may need to file an amended return if, because their income was too high, they didn’t claim the earned-income tax credit on their 2020 return.
The EITC helps low-to-moderate-income workers and families reduce their taxes and can result in a refund. It is one of the biggest tax breaks: Working families with three or more qualifying children are eligible for up to $6,660. Workers without a qualifying child can receive up to $538.
In cases where someone claimed the EITC, the IRS said it can adjust the return to account for a change in their income status as a result of the unemployment tax break.
For those who haven’t filed yet, the IRS said it is working with the tax preparation industry to make sure the software the companies use has the updated instructions. If you’re doing your own taxes, you can find an updated worksheet about the unemployment income exclusion at irs.gov/form1040.
By the way, to claim the EITC, you must have earned income. In a typical tax year, you wouldn’t be able to count unemployment benefits toward qualifying for the EITC. However, to address the high number of people who lost their jobs because of the pandemic, the Taxpayer Certainty and Disaster Tax Relief Act of 2020, signed into law Dec. 27, expandedeligibility for the EITC, allowing people to use their 2019 earned income to claim the credit.
This new federal tax break for unemployment compensation, I’m sure, will be a welcome relief for millions of Americans. But here’s the problem: It’s a one-time deal that applies only to the 2020 tax year. Congress should act to make the tax break permanent.
People shouldn’t have to pay taxes on their unemployment checks. Until 1979, unemployment benefits weren’t taxed by the federal government. The benefits have been fully taxable since 1986.
Some policymakers had argued that unemployment compensation should be taxed because people needed a disincentive to rely on this type of assistance. It’s a ridiculous argument pushed by politicians who clearly have never worked with the unemployed.
I have a lot of experience helping people who have lost their jobs. Not once have I ever heard anyone refer to their unemployment benefit as some sort of jackpot. People aren’t jumping for joy that they can sit back and stream movies on Netflix all day.
Even with the enhanced benefits because of the pandemic, many families are still struggling to make ends meet. The money people collect in unemployment is a help but hardly a windfall worth turning down a good job offer for. It’s a financial lifeline that recipients know will be cut eventually — after 26 weeks for most. Taxing this compensation doesn’t incentivize people to look for work. It just makes it harder for them to survive while they’re searching for employment.