Don't Mess With Taxes

No, that money from the Internal Revenue Service that just showed up in your bank account or snail mail box is not another COVID-19 economic impact payment.

It's the result of the IRS working through tax returns that were filed before a new tax law that excludes a chunk of unemployment benefits from taxation.

This week, the IRS announced that another 1.5 million taxpayers will get these unemployment-income-related refunds. The IRS says the average refund going out now is $1,686.

COVID relief for the out-of-work: This is the latest round of refunds made to comply with changes in the American Rescue Plan Act (ARPA). One of this COVID-relief law's provisions deemed $10,200 in unemployment insurance (UI) benefits issued last year, mostly to folks who lost jobs during coronavirus closures, was tax-free.

This tax exclusion applies to individuals and married couples whose modified adjusted gross income in 2020 was less than $150,000.

Shortly after the law took effect on March 11, the IRS started working to adjust returns of taxpayers who filed their tax year 2020 Form 1040s before the ARPA change and included all their 2020 UI benefits as income.

Waves of unemployment refunds: This is the fourth round of refunds related to the unemployment compensation exclusion provision. To date, the IRS says it's issued more than 8.7 million unemployment compensation refunds totaling more than $10 billion.

This latest batch of refunds included directly deposited amounts that showed up in accounts on July 28. Refunds that must be mailed as U.S. Treasury paper checks started going out via the U.S. Postal Service today, July 30.

If you reported all your 2020 UI income before the law change, but haven't yet received a refund, be patient. Yeah, I know, easier said than done.

The IRS says it's continuing to review and adjust tax returns that included unemployment income. It started with the simplest tax returns and now is reviewing more complex filings. As this process progresses, you should be in future distributions of UI refunds.

When to amend or not amend: In most cases, the IRS notes that taxpayers don't need to do anything. That includes not calling the IRS about your refund.

However, there are some cases where filing an amended tax refund could be worthwhile.

One common reason to rethink refiling your 2020 return is if, because of the excluded $10,200 per individual in unemployment compensation, you now have a lower adjusted gross income (AGI), you now qualify for tax deductions or credits you didn't claim on your original return. To now get these benefits, you need to file a Form 1040-X, Amended U.S. Individual Income Tax Return.

The IRS offers the following examples of when taxpayers should file an amended 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, such as education tax breaks. Be sure to include any required forms or schedules with your Form 1040-X.

The IRS also points out that taxpayers do not need to file an amended return if they:

• already filed a tax return and did not claim the unemployment exclusion; the IRS will determine the correct taxable amount of unemployment compensation and tax;
• have an adjustment, because of the exclusion, that will result in an increase in any non-refundable or refundable credits reported on the original return;
• did not claim the following credits on their tax return but are now eligible when the unemployment exclusion is applied: Recovery Rebate Credit, Earned Income Credit with no qualifying dependents or the Advance Premium Tax Credit. The IRS will calculate the credit and include it in any overpayment; and/or
• filed a married filing joint return, live in a community property state, and entered a smaller exclusion amount than entitled on Schedule 1, line 8.

Here's hoping your unemployment related overpaid taxes refund shows up in this group, or very soon, without you having to take any additional tax steps.

But don't ignore added filing if, per the examples above, the UI refund now means you can get even more back from Uncle Sam by amending your 2020 return.

You also might find these items of interest:  

• Tax breaks that can help minimum wage workers
• Unemployment helps after a job loss, but it's taxable income
• 4 million unemployment-adjusted tax refunds headed to early filers (July 13, 2021)

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