IRS to Recalculate Taxes on Unemployment Benefits; Refunds to Start in May
IRS announced on Wednesday that it will automatically refund money this spring and summer to people who filed their tax return reporting unemployment compensation before the recent changes made by the American Rescue Plan. The first refunds are expected to be made in May and will continue into the summer.
The new legislation allows taxpayers who earned less than $150,000 in modified adjusted gross income (AGI) to exclude 2020 unemployment compensation up to $20,400 if married filing jointly and $10,200 for all other eligible taxpayers.
For those taxpayers who already have filed and figured their tax based on the full amount of unemployment compensation, IRS will determine the correct taxable amount of unemployment compensation and tax. Any resulting overpayment of tax will be either refunded or applied to other outstanding taxes owed.
IRS will do these recalculations in two phases, starting with those taxpayers eligible for the up to $10,200 exclusion. 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.
For example, IRS can adjust returns for those taxpayers who claimed the Earned Income Tax Credit (EITC) and, because the exclusion changed the income level, may now be eligible for an increase in the EITC amount which may 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. More information for those taxpayers who have not filed already is available here
Read the full news release here