July has become a big month for the Internal Revenue Service.
Last year, in the heart of the COVID-19 pandemic, July 15 was the delayed regular tax return filing deadline. This year, July 15 is the kickoff date for Advance Child Tax Credit payments and resumption of some IRS collection and enforcement efforts.
This summer month also a welcome time for folks who early in 2021 filed tax returns reporting all their 2020 unemployment benefits. The IRS announced today that around 4 million of those taxpayers are about to get refunds for their tax overpayments.
Where the IRS has taxpayers' direct deposit data, it will issue those unemployment insurance-based refunds to bank accounts beginning Wednesday, July 14. Where U.S. Treasury paper refund checks must be mailed, the IRS says they will be in U.S. Postal Service hands beginning July 16.
The average refund, regardless of how it's being delivered in this latest distribution round, is $1,265.
Why money is coming back to filers: This is the third batch of refunds related to overpaid taxes due to last year's unemployment compensation. The benefits were collected by millions when they lost their jobs due to COVID-19 related business reductions and closures.
The refunds were created due to a provision in the American Rescue Plan Act (ARPA) of 2021. This coronavirus relief measure, which became law in March, excluded up to $10,200 in 2020 unemployment compensation from taxable income. The nontaxable amount applied to individuals and married couples whose modified adjusted gross income was less than $150,000.
However, the tax break was too late for millions of 2020 tax return filers who received unemployment insurance (UI) benefits. They filed before ARPA was enacted and, following the law at that time that said all unemployment is taxable income, counted all of last year's UI payments.
Shortly after ARPA was on the books, the IRS began reviewing 2020 filings — 1040 and 1040-SR forms — that included UI income. In most cases, affected taxpayers didn't (and still don't) have to do anything but way for their appropriate refunds on their unemployment-based tax overpayments.
Smaller refunds for some: In this latest refund review, the IRS says it IRS identified approximately 4.6 million potentially affected taxpayers. Of that number, the agency found around 4 million taxpayers due a refund.
If you're among the refund receiving group, great. But also note that the previously cited refund average is just that, an average. Some will receive refunds of more than $1,265. Others will get less.
One reason you might get a smaller than expected UI-based refund is because the amount was offset to cover prior federal or state tax or other authorized debts (student loans, child support) you owe.
Taxpayers who do get refunds of any amount also should receive letters from the IRS, generally within 30 days of the adjustment, with details on the refund amount, as well as any adjustments to it, noting the amount taken from the refund and why.
1040-X follow-up filings for some: This week's delivery of unemployment income related refunds is great news for the 4 million or so who'll soon have the added money.
But some in this group also now have another 2020 tax task. They need to file an amended tax return.
Amending last year's return is a good idea if, thanks to eliminating $10,200 from your 2020 income, you now qualify for other tax deductions or credits that you didn't claim on your original filing.
That could be the case for two popular tax credits. File a Form 1040-X, Amended U.S. Individual Income Tax Return, if you didn't claim but now are eligible for the —
- Additional Child Tax Credit (ACTC), claimed on Schedule 8812, and/or
- Earned Income Tax Credit (EITC) and you have qualifying dependents, claimed on Schedule EIC.
In both of these credit cases, many taxpayers might find that after subtracting the $10,200 UI exclusion they originally reported, they now have a lower adjusted gross income (AGI) that makes them eligible for the ACTC and/or EITC.
In addition, you (or your tax preparer) should review other credits and/or deductions that are based on AGI. If you qualify for any of these now with your lesser earnings, claim those, too, on Form 1040-X.
Yes, it's more tax work. But filing an amended return could mean more money in your pocket, and that's always worth the effort.
You also might find these items of interest:
- Don't miss these 12 often overlooked tax breaks
- Tax breaks that can help minimum wage workers
- Tax-free unemployment change could require amended tax return filings