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Did You File Before Congress Passed the Unemployment Tax Exclusion? Here is How the IRS is Handling

Article Highlights:

  • American Rescue Plan Act

  • Unemployment Income Exclusion

  • Early Filers

  • IRS Automatic Adjustment

  • Refund Schedule

  • Method of Payment

  • Refund Offsets

  • Potential Need for Amended Return

  • Adjustment Notice

Normally, unemployment insurance benefits are fully taxable for federal purposes. However, earlier this year, about the middle of the tax filing season, Congress, as part of the American Rescue Plan Act, decided that each individual who received unemployment benefits could exclude the first $10,200 of those benefits from taxation if their modified AGI was less than $150,000.


This created a problem, since the exclusion was announced after millions of taxpayers had already filed their tax returns. The IRS, not wanting to deal with amended returns from all those early filers, announced they would automatically make the adjustment and send out the appropriate refunds, The IRS also cautioned taxpayers not to file amended returns since the Service would be making the adjustment.


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 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 where a taxpayer included bank account information on their 2020 tax return; otherwise, the refund will be by a 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 urged to retain the notice and forward it to this office, since the IRS concedes they may not pick up all the adjustments made possible by the reduced income as discussed below.


Refunds will be subject to normal 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). 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, such as the EITC for their qualifying children, increased Premium Tax Credit, and other limitations based upon income. An amended tax return can be filed after the 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) that is available to those who purchase their health insurance from a government marketplace. If a taxpayer paid an excess APTC repayment amount when they filed their 2020 return, the IRS will also refund that amount automatically. If the IRS corrects the taxpayer’s account to reflect the unemployment income exclusion, and the taxpayer’s original return included an excess APTC amount that the taxpayer paid, the IRS will include that adjustment as well.


Please remember to forward a copy of the IRS Notice explaining the changes they made to this office for review to ensure there are no other changes that can result in an additional refund for you, and as always, please call if you have questions.


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