Tax-free unemployment change could require amended tax return filings
Wednesday, March 10, 2021
The American Rescue Plan is now on its way to President Joe Biden. As soon as Biden signs it, millions of taxpayers can look forward to the third COVID-19 economic relief payment.
And taxpayers who've already filed their 2020 returns and paid tax on unemployment benefits they received last year also can get ready to file amended returns.
That's because during its consideration of the bill last week, the Senate included a provision that made the first $10,200 in unemployment benefits tax-free.
UPDATE, Thursday, March 11, 2021: Biden signed the bill into law early in the afternoon today. He originally been scheduled to sign the bill on Friday, after it had been reviewed again and printed. However, the White House decided to move up Biden penning his enactment signature to the enrolled bill after it arrived at the White House on Wednesday night so that its help provisions could begin. A ceremonial signing with members of Congress will be held as planned on Friday.
UPDATE, Tuesday, March 16, 2021: The IRS today said taxpayers who filed before the American Rescue Plan became law and paid tax on all their unemployment benefits should not amend those 2020 returns. The agency is working further guidance for these early filers.
UPDATE, Sunday, March 21, 2021: IRS Commissioner Chuck Rettig told a Ways and Means Subcommittee today that there is no need to file amended returns to get benefits of the American Rescue Plan's exemption of $10,200 in unemployment benefits. The IRS, said Rettig, will automatically issue refunds on tax-free unemployment to eligible early filers.
Usual taxable income rule on hold for 2020: In normal tax (and life) times, unemployment benefits count as taxable income.
But since the COVID-19 pandemic led to an historic level of unemployment last year, Congress decided the old rule needed to be put on hold when it comes to 2020 taxes. Many of those who received the out-of-work assistance, which hit 20.5 million last May, did so for the first time and did not realize the benefit was taxable.
That shock, both emotional and to their already whacked bank accounts when they realized they owed unexpected taxes apparently resonated with Congress. So Congress agreed to make a portion of unemployment received in 2020 tax-free.
Specifically, $10,200 of the benefits is exempt from tax for individual filers whose 2020 adjusted gross income (AGI) is less than $150,000. That same $150,000 AGI threshold also applies to married couples who file a joint return, but each spouse is entitled to the exemption meaning up to $20,400 of the benefits is not taxed on their tax filing.
Those amounts could make a big difference in a tax bill or the size of a possible refund. That means early filers who counted unemployment as income on their Form 1040s likely will want to file since Form 1040-X, Amended U.S. Individual Income Tax Return.
Timing and next steps: Biden is expected to sign the bill into law as soon as Friday. He's not dallying; there are some technical steps all legislation must take before a measure is ready for presidential signature
After the bill is officially the law, the Internal Revenue Service is likely to issue guidance as to what early filers should do if they are affected by law changes in the American Rescue Plan. For many, that likely will mean submitting an amended return.
If you're among those who'll be looking to file an amended return to get the unemployment tax break or for any other needed correction, here are some Form 1040-X frequently asked questions and answers.
How can I file an amended tax return?
You'll need to complete Form 1040-X. The good news is that this form, at least in connection with tax years 2019 and 2020, now can be submitted electronically. That should help in the correction process.
If you used tax software, it should have this option. If you hired a tax preparer, that pro should be able to help you with this additional filing. And if you prefer paper, and some folks do, you also can still fill out the 1040-X by hand and snail mail it to the IRS.
You can use the 1040-X to make corrections to all versions of Form 1040. That's the Form 1040 itself, as well as Form 1040-SR used by older taxpayers and Form 1040-NR filed by nonresident aliens.
What do I need to file Form 1040-X?
Before you start work on your 1040-X, you'll obviously need the original 1040 that you want to change. You'll be asked to enter the original amounts on that first filing, the amount that you want/need to change, the correct new amount and the difference between the two. But as you can see in the 1040-X image below, the entries go in columns A (original amounts), B (net change) and C (correct amount).
Again, tax software you or your tax pro used and its Q&A format will make this easier, pulling in your old data. That way you just have to enter the amended info.
And when you electronically file either an amended Form 1040 or 1040-SR, you'll need to submit along with the Form 1040-X all necessary forms and schedules as if the correction were your original filing. The full document filing is required even though some forms may not have any adjustments.
What are the e-filed 1040-X signature requirements?
Each time you electronically file a Form 1040-X, you also must submit a new Form 8879, IRS e-file Signature Authorization.
Will e-filing an amended speed up the processing of the 1040-X?
While e-filing should make correcting a prior return (for 2019 or 2020) easier, it won't necessarily mean your changes will be processed more quickly. The IRS says that it currently takes up to 16 weeks to process an amended tax return. That time frame applies to both paper and electronically filed 1040-X forms.
And the IRS notes that calling the agency's help hotline won't speed up the processing. Neither will stopping by Taxpayer Assistance Center. IRS phone and walk-in representatives can only research the status of your amended return 16 weeks or more after you've mailed it.
Can I get any sort of status information about my 1040-X?
Yes. The IRS' online Where's My Amended Return? follows the processing stages of your amended return from receipt until completion. It will tell you if your return, whether mailed or electronically submitted, is in received, adjusted or completed status. You can check the status of your Form 1040-X three weeks after you submit it. If you don't have online access, you can call, again three weeks after you filed the 1040-X, the IRS toll-free amended return status line (866) 464-2050. Both the online and phone search options are available in English and Spanish. The online search tool is updated once a day, usually at night.
What's the deal if after 16 weeks my Form 1040-X still hasn't been processed?
The IRS says there are several reasons why some amended returns take longer than 16 weeks to process. Delays may occur when the return needs further review because it:
- Has errors
- Is incomplete
- Isn't signed
- Is returned to you requesting more information
- Includes a Form 8379, Injured Spouse Allocation
- Is affected by identity theft or fraud
Delays in processing also can happen when an amended return needs:
- Routing to a specialized area
- Clearance by the bankruptcy area within the IRS
- Review and approval by a revenue office
- Review of an appeal or a requested reconsideration of an IRS decision
The IRS should contact you whenever it needs more information to process your amended return.
I'm getting a refund based on my 1040-X filing. Can I have that directly deposited to my bank account?
Sorry, but the IRS says direct deposits are not allowed at this time for amended tax returns.
Getting it right pays off: Here's hoping you never make any errors on your tax return. That way you won't have to file a Form 1040-X, which now is part of the Tax Forms Fiesta! special blog page.
But none of us is perfect. And as the changes to the latest coronavirus relief plan show, sometimes we taxpayers have to deal with law changes that affect our filings.
And even if you find filing an amended return will cost you, it's better to do so before Uncle Sam discovers the mistake. Penalties and interest are tacked on to what you owe, but if you catch them quickly, you can limit those added charges.
Whatever the reason for filing Form 1040-X, it's to your benefit — and often better for your bank account — to make sure that your filing is correct.
You also might find these items of interest:
- 5 amended tax return filing tips
- Unemployment helps after a job loss, but it's taxable income
- Lingering unemployment tax troubles: wrong amounts, wrong recipient ID info and no forms
|Coronavirus Caveat & More Information
In 2021, we all still are dealing with extraordinary circumstances,
both in our daily lives and when it comes to our taxes.
The COVID-19 pandemic and efforts to reduce its transmission
and protect ourselves and our families means that,
for the most part, we're focusing on just getting through these trying days.
But life as we knew it before the coronavirus will return,
along with our mundane tax matters.
Here's hoping that happens soon!
In the meantime, you can find more on the virus and its effects on our taxes
by clicking Coronavirus (COVID-19) and Taxes.
When will we get the rest of our return from the unemployment tax credit
Posted by: Nicole | Monday, March 29, 2021 at 02:54 PM
We'll have to wait for the IRS guidance, but as a general rule, when amounts are exempt, they don't count toward AGi.
Posted by: Kay Bell | Thursday, March 11, 2021 at 11:29 AM
Hey, do you know if the new unemployment income exemption will lower the AGI or will it come off after the AGI?
I'm wondering what it will do to the health insurance Premium Tax Credit :)
Posted by: Just Ducky | Wednesday, March 10, 2021 at 08:06 PM