You lost your job last year and collected unemployment.
You knew that the benefits are taxable income, so when you filed your 2020 tax return earlier this year, your calculations made sure that Uncle Sam got his piece of your unemployment money.
Then along came the American Rescue Plan Act (ARPA), signed into law on March 11, and its provision excluding a portion of jobless benefits from tax.
How do you get your overpaid unemployment taxes back?
This week, the Internal Revenue Service followed up on its earlier announcement that filers shouldn't amend their 2020 returns because of the new law. The tax agency is working on adjustments to those returns due to the unemployment exclusion and says any resulting refunds should start going out in May.
Relief from surprise tax: The COVID-19 pandemic cost millions of workers — around 40 million by one estimate — their jobs last year. More than 23 million of them, by the Bureau of Labor Statistics' count, applied for unemployment. Some self-employed workers also qualified for the benefits.
Many of those seeking government financial help were first-time recipients of unemployment who didn't realize its looming tax cost.
To ease some of that surprise tax pain, ARPA excludes up to $10,200 in unemployment from taxes for taxpayers whose 2020 modified adjusted gross income (MAGI) is less than $150,000.
The exclusion's income cap applies regardless of filing status, but the exclusion amount is per person. So married couples who meet the earnings requirement and where each spouse received jobless financial assistance, each can exclude up to $10,200 from their combined income on their joint return.
No need to file amended return: Almost as good as the tax savings is the IRS decision to do the math for affected early filers.
For taxpayers who already have filed and their 2020 tax is based on the full amount of unemployment compensation they received last year, the IRS will determine their correct taxable amount of the benefits and resulting tax liability.
The IRS then will either apply any resulting tax overpayment to other outstanding taxes or refund the excess to the taxpayers.
Two return adjustment phases: The IRS' recalculations of already-filed returns with unemployment compensation will be in two phases.
The math first will be done on returns filed by single taxpayers who are eligible for the exclusion of up to $10,200. Once those are done, the IRS will recalculate returns for jointly filing married taxpayers who could get as much as $20,400. Other more complex returns involving unemployment benefits also will be part of the second phase of corrections.
That means the single taxpayers will get their potential refunds first, sometime in May if the IRS planned timetable holds. Subsequent adjustments and refunds due to the excluded unemployment benefits will continue into the summer, according to the IRS.
Some amendments might be worthwhile: While in most cases, this process means taxpayers won't need to file an amended return, there are some cases where a Form 1040-X might be a good tax move.
Amending your 2020 Form 1040 could be worthwhile if the new unemployment exclusion math means you now are eligible for additional federal tax credits and deductions that weren't claimed on your original return.
For example, IRS personnel can adjust returns for those taxpayers who claimed the Earned Income Tax Credit (EITC) and, because the exclusion changed their income level, may now be eligible for an increase in the EITC amount. Since this is a refundable tax credit, the change could produce a new or larger refund.
But taxpayers who didn't originally claim the EITC would have to file amended returns to claim the credit for which, thanks to the unemployment exclusion changes, they now qualify.
Double check state taxes: Whether the IRS makes the unemployment taxation changes or you amend your return, don't forget about your state taxes.
Most states that have personal income taxes require that their residents use information from their federal returns to complete their state tax filings.
Changes to the federal 1040 will probably mean changes also are necessary to state returns.
New instructions for those yet to file: If you've yet to file your 2020 tax return, then you should be OK. The IRS says it has worked with tax return preparation software manufacturers to get the new ARPA unemployment changes into the programs.
All you'll need to do in these cases is respond to the new related questions when electronically preparing your return.
You can get a preview of the filing changes, instructions and an updated worksheet in my earlier post about the IRS' initial guidance in light of the new unemployment exclusion.
You also can check out the IRS' special web page on the New Exclusion of up to $10,200 of Unemployment Compensation for information and examples.
You also might find these items of interest:
- EITC claiming option: use 2019 or 2020 income
- Moves to make (+ tax tips!) if you've lost your job
- Hawai'i looks to be lone holdout in making May 17 Tax Day
|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.