IRS Recalculating Taxes on Unemployment Benefits

IRS begins correcting tax returns for unemployment compensation
income exclusion.

Periodic payments to be made
May through summer.

The Internal Revenue Service will begin issuing refunds to eligible taxpayers who paid taxes on 2020 unemployment compensation. The recently enacted American Rescue Plan later excluded this compensation from taxable income.

American Rescue Plan of 2021

The IRS identified over 10 million taxpayers who filed their tax returns prior to the American Rescue Plan of 2021 becoming law in March and is now reviewing those tax returns to determine the correct taxable amount of unemployment compensation and tax. This review could result in a refund, a reduced balance due, or no change to tax (no refund due nor amount owed).

These corrections are being made automatically in a phased approach, easing the burden on taxpayers. The first phase is underway and includes the simplest returns. The next phase will involve more complex tax returns. The IRS anticipates it will take through the end of summer to review and correct these returns.

When To Expect Refunds

The first phase of adjustments is being made for single taxpayers who had the simplest tax returns, such as those filed by taxpayers who did not claim children or any refundable tax credits.

The IRS will issue refunds resulting from this effort by direct deposit for taxpayers who provided bank account information on their 2020 tax return. The refund will be mailed as a paper check to the address of record if valid bank account information is not available. The IRS will continue to send refunds until all identified tax returns have been reviewed and adjusted.

These refunds are 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.

Notices Explaining Corrections

The IRS will send taxpayers a notice explaining the corrections, which they should expect within thirty days of when the correction is made. Taxpayers should keep any notices they receive for their records and should review their return after receiving their IRS notice(s).

Earned Income Tax Credit and the Recovery Rebate Credit

Correction to any Earned Income Tax Credit (EITC) without qualifying children and the Recovery Rebate Credit are being made automatically as part of this process. 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. If so, they should file an amended tax return if the revised adjusted gross income amount makes them eligible for additional benefits.

More complex corrections will begin upon the completion of the first phase and involve couples filing as married filing jointly.

Unemployment Compensation Exclusion

Unemployment compensation is taxable income. The American Rescue Plan excludes $10,200 in 2020 unemployment compensation from income used to calculate the amount of taxes owed. The $10,200 per person exclusion applies to taxpayers, single or married filing jointly, with modified adjusted gross income of less than $150,000.

The $10,200 is the amount of income exclusion, not the amount of the refund. Refund amounts will vary and not all adjustments will result in a refund.

Repayment of Excess Advance Premium Tax Credit

The legislation also suspends the requirement to repay excess advance payments of the Premium Tax Credit (excess Advance Premium Tax Credit). If a taxpayer paid an excess APTC repayment amount when they filed their 2020 return, the IRS is also refunding this amount automatically. If the IRS corrects the taxpayer’s account to reflect the unemployment income exclusion, the excess APTC amount that the taxpayer paid will be included in that adjustment. The IRS is also adjusting accounts for those who repaid excess APTC but did not report unemployment compensation on their 2020 tax return.

A Final Note

Taxpayers who have not yet filed a tax return may contact their tax professional for guidance.

Stay safe. Stay well.