The Internal Revenue Service will begin refunding money to people in May who already filed their returns without claiming the new tax break on unemployment benefits, the agency said Wednesday.
The federal tax break went into effect following the recent changes made by the American Rescue Plan. The latest $1.9 trillion stimulus package created a new tax break for tens of millions of workers who received unemployment benefits last year after businesses were forced to close and lay them off during the coronavirus pandemic.
About 40 million Americans received unemployment benefits in 2020, according to The Century Foundation, a nonprofit think tank. Many Americans who were potentially left with a surprise tax bill on that jobless aid are poised to benefit from the new exemption. Until now, jobless insurance had to be reported as taxable income and many would likely owe federal income taxes on those benefits.
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The legislation allows taxpayers who earned less than $150,000 in adjusted gross income to exclude unemployment compensation up to $20,400 if married filing jointly or $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 take steps in the spring and summer to make the appropriate change to their return, which may result in a refund,” the IRS said in a statement. “The first refunds are expected to be made in May and will continue into the summer.”
Here’s what you need to know:
What if I already filed my taxes?
For those taxpayers who already have filed and figured their tax based on the full amount of unemployment insurance, the IRS will determine the correct taxable amount of unemployment compensation and tax, according to the agency. Any resulting overpayment of tax will be either refunded or applied to other outstanding taxes owed, the IRS added.
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.
What if I haven’t filed yet?
The IRS worked with the tax preparation software industry (including TurboTax and H&R Block) to reflect these updates so that those who file electronically need to respond to the related questions when preparing their returns, the agency said.
The agency provided an update about the new exclusion of up to $10,200 of unemployment compensation on its website here.
Don’t file an amended return
The IRS has stressed that taxpayers shouldn’t 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.
The IRS, for instance, can adjust returns for taxpayers who claimed the Earned Income Tax Credit, a refundable tax credit for low- to moderate-income working individuals and couples, particularly those with children.
Because the exclusion changed the income level, those people may now be eligible for an increase in the EITC amount which may result in a larger refund. Taxpayers, however, would have to file an amended return if they didn’t originally claim the EITC or other credits but now are eligible because the exclusion changed their income. These taxpayers should review their state tax returns as well.
What about state taxes?
More than half of states levy an income tax on jobless benefits. States will have to decide if they will also offer the tax break on state income taxes.
It’s possible that some may still opt to tax the jobless aid, experts say.
Some already exempt taxes on unemployment, including California, New Jersey, Virginia, Montana and Pennsylvania. And some don’t levy state income taxes at all, including Texas, Florida, Alaska, Nevada, Washington, Wyoming and South Dakota.
This article originally appeared on USA TODAY: Unemployment $10,200 tax credit: IRS begins refund in May if you filed
This article is auto-generated by Algorithm Source: finance.yahoo.com