IRS to recalculate taxes on unemployment benefits; refunds to start May 2021

Tax Law and News IRS

To help taxpayers, the IRS will take steps to automatically refund money in spring and summer 2021 to people who filed their tax return reporting unemployment compensation before the recent changes made by the American Rescue Plan.

The legislation, signed March 11, 2021, allows taxpayers who earned less than $150,000 in modified adjusted gross income to exclude unemployment compensation up to $20,400 if married filing jointly, and $10,200 for all other eligible taxpayers. The legislation excludes only 2020 unemployment benefits from taxes.

Because the change occurred after some people filed their taxes, the IRS will first look to see if the original return was amended before taking steps in the spring and summer to make the appropriate change to their return, which may result in a refund. The first refunds are expected to be made in May, and will continue into the summer.

For taxpayers who already have filed and figured their tax based on the full amount of unemployment compensation, the IRS will determine the correct taxable amount of unemployment compensation and tax. Any resulting overpayment of tax will be refunded or applied to other outstanding taxes owed.

For those who have already filed, the IRS will do these recalculations in two phases, starting with those taxpayers eligible for the up-to-$10,200 exclusion. The IRS will then adjust returns for those married filing jointly taxpayers who are eligible for the up-to-$20,400 exclusion and others with more complex returns.

There is no need for taxpayers to file an amended return unless the calculations make the taxpayer newly eligible for additional federal credits and deductions not already included on the original tax return. And, consider that when a taxpayer has scheduled an electronic funds withdrawal of balance due and now owes less tax as a result of legal changes such as these, the IRS allows taxpayers to change the date and method of electronic payment.

For example, the IRS can adjust returns for taxpayers who claimed the Earned Income Tax Credit (EITC) and, because the exclusion changed the income level, the taxpayers may now be eligible for an increase in the EITC amount that could result in a larger refund. 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.

The new IRS guidance also includes details for those eligible taxpayers who have not yet filed.

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