IRS Begins Issuing Unemployment Income Exclusion Refunds

By: Stacey Nickens

The IRS announced that they will begin issuing refunds to taxpayers who paid taxes on their 2020 unemployment benefits. The American Rescue Plan Act legislated that up to $10,200 in unemployment compensation per individual could be excluded from taxable income. However, by the time the Act passed, some taxpayers had already submitted returns that did not reflect this exclusion.

The IRS has asked taxpayers to not submit corrected returns. Instead, the agency will automatically issue refunds, beginning with single taxpayers who have simple returns. For example, the IRS said they will begin issuing refunds this week to those who did not claim any children on their return or who didn’t claim any refundable credits.

The IRS will send refunds via direct deposit if the taxpayer provided bank account information on their 2020 return. Those who did not provide bank account information or whose bank account information is no longer valid will receive their refund by check.

After sending refunds to single taxpayers with simple returns, the IRS will continue issuing corrections and/or refunds to all of those who are eligible for the unemployment compensation tax exclusion stipulated in the American Rescue Plan Act. The Act declared that up to $10,200 in unemployment compensation could be excluded from income for tax purposes. Each taxpayer in a family could exclude up to $10,200 in unemployment benefits from taxable income, such that married couples may be able to each exclude that amount from their own incomes. The exclusion is only available to taxpayers with an adjusted gross income of less than $150,000.

Because $10,200 is the amount of the exclusion, not all taxpayers who paid taxes on their unemployment benefits will receive a refund. A taxpayer’s taxable income will be adjusted accordingly, and the IRS will calculate how large of a refund is due to the taxpayer, if any.

The IRS will send taxpayers a notice explaining the correction to their taxable income. It is prudent for taxpayers to save this notice and to review their return following the correction.

Corrections to a return may change the size of a taxpayer’s earned income credit without qualifying children and/or may change the size of a taxpayer’s recovery rebate credit. The IRS will automatically calculate those adjustments based on a taxpayer’s adjusted gross income minus their unemployment income exclusion. The IRS will do so for taxpayers who claimed those credits on their original return.

However, some taxpayers may not have applied for those credits on their original return because their adjusted gross income disqualified them from doing so. If a taxpayer’s modified adjusted gross income brings them below the income threshold for a tax credit, the taxpayer should file an amended tax return to claim these additional benefits. Again, the taxpayer should only submit an amended tax return if they did not claim those income-based credits on their original return.

If you have any questions about your modified adjusted gross income and how it may impact your return, please do not hesitate to reach out to our qualified tax team for assistance.