The American Rescue Plan changed how unemployment benefits would be taxed for 2020, but many people had already filed their taxes for the year. In response, the Internal Revenue Service (IRS) will recalculate taxes and offer automatic refunds, starting in May.
How the American Rescue Plan Updates Unemployment Benefits
Unemployment benefits have been a lifeline for countless Americans during the coronavirus (COVID-19) pandemic. In the American Rescue Plan, President Biden extends unemployment insurance until September 6, 2021, including the $300 supplemental benefit.
Biden also announced that the first $10,200 of unemployment benefits would be tax-free for people with incomes less than $150,000.
According to the IRS:
“The legislation, signed on March 11, allows taxpayers who earned less than $150,000 in modified adjusted gross income to exclude unemployment compensation up to $20,400 if married filing jointly and $10,200 for all other eligible taxpayers.”
What to Do If You Have Already Filed Your Taxes
If you have already filed your taxes, and the only thing you need to update is an exclusion of your unemployment benefits, you do not need to file an amended return. The IRS will calculate the correct amount of taxes, and either refund the overpayment or apply it to an outstanding balance. Automatic refunds should begin in May and continue throughout the summer.
Excluding unemployment benefits may make some people eligible for federal credits and deductions that were not present on their original tax returns. If this is the case for you, you will need to file an amended tax return. For example, you can file an amended tax form to claim the Earned Income Tax Credit (EITC) if the unemployment exclusion changes your income level. If you already claimed the EITC, the IRS can adjust your refund accordingly.
The IRS recommends taxpayers review their state tax returns, as well.
What to Do If You Haven’t Filed Yet
If you have not filed your 2020 taxes yet, the deadline to do so is May 17, 2021. The IRS has also issued new guidance for taxpayers who have not yet filed. Those filing online can simply answer questions crafted by the IRS and the tax return preparation software industry, and those filing paper returns can use Form 1040 to calculate their unemployment exclusions.
Overwhelmed by Taxes?
You’re not alone. In 2020, over 23 million U.S. workers filed for unemployment. Many of these individuals owed more than they expected in taxes, and millions of Americans were already in a tough spot before tax season.
If you’re wondering how you are going to deal with the IRS this year, let Buchalter & Pelphrey Attorneys At Law be your guide. Together, our lawyers have been helping members of our community resolve their financial difficulties for more than 45 years.
We can help you, too. Simply call us at (321) 320-6088 or contact us online to discuss your situation during a free consultation.