Could You Be Eligible for an Unemployment Tax Refund?

The IRS is issuing unemployment tax refunds for 2020. Here is what to know so that you don't miss out on the check you deserve.

If you’ve ever received unemployment benefits before, then you know that there’s a downside. In addition to meeting all the eligibility requirements, you also have to pay taxes on the money you claim. At least that’s how it worked until March 2021, when the American Rescue Plan Act changed the rules.

Now millions of American taxpayers are receiving checks from the IRS. Are you eligible to receive an unemployment tax refund? If so, how much can you expect? Read on for the answers to those questions and more.

American Rescue Plan Act of 2021

As part of the relief bill enacted by Congress in March 2021, the US government enacted emergency changes to the unemployment benefits program. This plan re-extended benefits for those impacted by job loss during the pandemic, as the original extension was set to expire.

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In addition, the plan included a provision to waive taxes on the first $10,200 of unemployment payments received in 2020. Given that the new plan was only signed into effect by President Joe Biden on March 11, many people had already filed their 2020 taxes. Others were not aware of the change until after they had filed. That created a billion-dollar problem for the IRS.

Why Tax Unemployment Benefits?

Before the American Rescue Plan Act of 2021, people who received unemployment benefits had to pay taxes on the money they received. While they did not have to contribute to Social Security and Medicare, as with a traditional paycheck from an employer, a certain amount of tax still applied. That’s because the IRS treats those benefits as income.

When filing for unemployment, the most common advice is to opt to withhold that tax from the checks rather than face a big bill at the end of the year. However, thanks to the new law, those withheld taxes now need to be refunded. In addition, anyone who paid taxes on unemployment benefits when filing is also owed a refund.

How Many People Were Overtaxed?

The IRS claims that at least 16 million taxpayers are owed a refund on their 2020 taxes. Because of the economic downturn, an unprecedented number of people claimed unemployment benefits in 2020. In addition, those benefits were extended past the normal window and increased by an additional boost of up to $300 in some states.

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Per the IRS, “over 23 million U.S. workers nationwide filed for unemployment last year. For the first time, some self-employed workers qualified for unemployed benefits as well.”

That resulted in more unemployment benefits received–and, subsequently, more tax withheld. In August, the IRS issued the first round of refunds to these taxpayers. They were able to refund $14.4 billion in total to 11.7 million taxpayers. However, that still left over 4 million people without the refund they are owed.

New Batch of Refunds Issued

Earlier this month, the IRS announced that they had issued an additional 430,000 refunds to people who had claimed unemployment benefits and paid taxes in 2020. This round of refunds totalled about $510 million.

“The review of returns and processing corrections is nearly complete as the IRS already reviewed the simplest returns and is now concentrating on more complex returns,” a press release from the IRS stated.

Why is this process taking so long? For one thing, Congress moved slowly to get the bill on President Biden’s desk. For another, the IRS is recalculating the refunds in batches, starting with the most straightforward returns and moving on to more complicated filings.

The IRS has not yet confirmed when the refund process will be completed. The remaining returns are being manually reviewed in the IRS Error Resolution System. Anyone who has dealt with that before can tell you that manual review is often a lengthy and frustrating process. There will be at least one additional batch of refunds before the end of the year, but there is no guarantee that all the returns will be evaluated before December 31.

How Much Can You Get?

According to the IRS, the average refund is $1,686. The exact dollar figure depends on how much unemployment compensation you received, how much tax you withheld or paid, and your other income, liabilities, and deductions.

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Only the first $10,200 of your unemployment benefits (or $20,400 for couples who filed jointly) is eligible for a tax refund. In addition, your modified gross income for the year must be less than $150,000.

If you owe unpaid federal or state taxes, then your refund could be seized to cover the balance. In addition, your refund could be diverted in the case of unpaid child support. The refund only applies to taxes filed for 2020, so previous unemployment compensation is not included. If you failed to file your taxes on time, you need to do so as quickly as possible.

How Will You Get Your Refund?

According to the IRS:

Impacted taxpayers will generally receive letters from the IRS within 30 days of the adjustment, informing them of what kind of adjustment was made (refund, payment of IRS debt payment or payment offset for other authorized debts) and the amount of the adjustment.

In other words, you’ll get a letter explaining whether you’ll get a refund and how much you can plan to receive. Please save this letter! You may need it later if you want to check on the status of your refund.

The payment will arrive either as a direct deposit or a paper check, depending on how you set up your account when filing your 2020 taxes. If you set up a direct deposit for your initial 2020 tax return, then look for “IRS TREAS 310 TAX REF” on your bank statement.

Do You Need an Amended Return?

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The short answer is no. Very few people need to file an amended return because of the new tax plan. However, if you fall into the following categories, you should file Form 1040-X, Amended U.S. Individual Tax Return:

  • You did not submit a Schedule 8812 with the original return to claim the Additional Child Tax Credit and are now eligible for the credit after the unemployment compensation exclusion;
  • You did not submit a Schedule EIC with the original return to claim the Earned Income Tax Credit (with qualifying dependents) and are now eligible for the credit after the unemployment compensation exclusion;
  • You are now eligible for any other credits and/or deductions not mentioned below. Make sure to include any required forms or schedules.

You Could Be Eligible for More Deductions Now

In some cases, you might be eligible for additional deductions on your 2020 tax return. The IRS will recalculate your eligibility for the Earned Income Tax Credit, Additional Child Tax Credit, American Opportunity Credit, Premium Tax Credit and Recovery Rebate Credit amounts.

The IRS will be sending letters in November and December to anyone who did not claim these credits. You will need to file an amended return if this is the case. You can find a link to Form 1040-X above.

Individual State Refunds

Every state handles the taxing of unemployment benefits in its own way. Some states collect no tax on unemployment and never have. Others previously taxed unemployment compensation but have temporarily adopted the same plan as the federal government.

To find out the details of how your state is handling this issue, head to Kiplinger for a state-by-state breakdown. Unlike federal tax returns processed by the IRS, some states are requiring that taxpayers file an amended return to receive a refund.

Still Waiting on Your Refund? Here’s What to Do

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The easiest way to find out the status of your payment is via the Where’s My Refund tool from the IRS. You can access it here. You will need your Social Security number, your filing status (e.g., single), and your exact refund amount.

Hang onto your letter from the IRS with that information! Otherwise, you’ll find it difficult to check on your status. You’ll need to visit IRS.gov and log in to view your tax records and request a transcript.

If you are unable to go online to access your account, you can call the agency’s automated phone service at 1-800-908-9946 to ask for a transcript. You are less likely to be successful if you contact the IRS by telephone for any other reason, however, and the agency advises taxpayers to use the online tools instead.

Will the Unemployment Tax Exclusion Continue for 2021 Taxes?

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If you received unemployment benefits in 2021, you might be wondering if the same deal will apply to your taxes when you file next year. It’s looking less and less likely that the American Rescue Plan will continue to help out taxpayers in any way, unfortunately. The economy is doing much better in November 2021 than it was last year, and unemployment rates continue to fall. That’s good news for the country at large, but potentially frustrating news for people who were hoping to catch a break on their taxes.

Just as the hopes for a fourth stimulus check are all but lost, experts warn that a tax break for people who experienced joblessness in 2021 is not likely to happen. If you opted not to withhold income tax from your unemployment compensation this year because you assumed it would be excluded, you could be looking at a surprise tax bill in early 2022.

USA Today recommends starting a savings account now to cover that bill. You could also call your state unemployment agency to request that they begin withholding taxes.

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