If you’re among the 40 million Americans who received unemployment compensation in 2020 and you’ve already filed your taxes, you could be getting a surprise refund. The IRS announced that it would start issuing refunds in May to taxpayers...
If you’re among the 40 million Americans who received unemployment compensation in 2020 and you’ve already filed your taxes, you could be getting a surprise refund.
The IRS announced that it would start issuing refunds in May to taxpayers who have submitted returns but qualify for a tax break on 2020 jobless benefits. Refunds will continue into the summer months.
Typically, unemployment benefits are taxed as ordinary income. But the $1.9 trillion American Rescue Plan that President Joe Biden signed into law on March 11 shields the first $10,200 of unemployment benefits for households with incomes under $150,000. If you’re married, each spouse can exclude the first $10,200 of unemployment benefits.
The new law, passed in the middle of tax season, left people who qualified for the tax break wondering if they’d need to file an amended return. But the IRS says that won’t be necessary. The IRS will automatically reconfigure the correct amount of unemployment compensation and taxes due, then either issue any extra money as a refund or apply it to taxes owed.
It’s not clear whether you’ll need to file an amended return if the tax break makes you eligible for certain tax credits, like the Earned Income Tax Credit.
You Still May Not Get a Break on State Taxes
Your state may not be feeling quite as generous as Uncle Sam. According to H&R Block, the following 13 states have yet to pass changes to exempt some unemployment from state taxes:
Colorado Georgia Hawaii Idaho Kentucky Massachusetts Minnesota Mississippi North Carolina New York Rhode Island South Carolina West VirginiaH&R block has suggested holding off on filing if you live in one of these 13 states and received unemployment benefits in 2020 in case your state changes its law.
What if I Haven’t Filed Yet?
If you haven’t filed your taxes yet, you can go ahead and use free tax filing software to submit your return. They’ll ask you a few questions to determine whether you qualify for the unemployment tax break.
The IRS has instructions on its website for those filing a paper return. But we’d strongly recommend filing online. The IRS has a huge backlog of unprocessed paper returns from 2019. Filing by paper could add months to the time it takes to process your return.
If you can’t afford your tax bill, even after the unemployment tax break, it’s still essential that you file your taxes or file for an extension by May 17. Note that filing for an extension only buys you time to file, but any money you owe is still technically due on May 17 — a month later than usual due to the tax deadline extension. You’ll minimize your penalties by filing an on-time return, even if you can’t pay anything.
Once you are able to resume payments, you can typically automatically get approved for an online payment plan within minutes. You can spread the bill out over up to 72 months in some cases if you sign up for an IRS installment plan.
One thing to keep in mind is that the tax break on unemployment is for 2020 only. If you’re still receiving benefits, consider having 10% automatically withheld by filing IRS Form W-4V if doing so wouldn’t put you behind on bills.
Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to AskPenny@thepennyhoarder.com.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.