Unemployment benefits can be a godsend when you lose your job. They also can be a god-awful problem at tax time.
That money you get to help tide you over until you find another job is taxable income.
In certain situations, however, lawmakers have provided unemployment compensation, or UC (and yes, that's its official name, so the compensation moniker explains the taxing), have exempted some of the government money from federal tax.
COVID UC exemption: That was the case during the height of the COVID-19 pandemic. The extraordinary circumstances of so many people losing their jobs at the same time called for extraordinary tax treatment. So, they came up with some relief in the American Rescue Plan Act (ARPA) of 2021.
ARPA excluded up to $10,200 that was received in 2020 from taxable income calculations. That applied individually, so in the case of a doubly unemployed married couple, each spouse got the $10,200 UC exemption. There was, however, an income limit. The tax-free UC amount was available only to individuals and married couples whose modified adjusted gross income was less than $150,000.
Unfortunately, Capitol Hill's decision to make a portion of UC tax free came too late for some recipients. ARPA didn't become law until March 11, 2021. By that date, millions of taxpayers had already filed their tax returns and paid tax on all the UC they had received the prior year.
So the Internal Revenue Service was given another COVID-related job. Get that tax-free UC money back to the rightful taxpayers.
The agency started that UC refund correction process in early April 2021. The IRS says it now has completed that job.
12 million got UC tax relief: On Jan. 6, the IRS announced that it had recently completed the final corrections of tax year 2020 accounts for taxpayers who overpaid their taxes on UC they received that year.
That doesn't mean, though, that every taxpayer who reported all their 2020 UC as taxable income got refunds. Some who overpaid had that amount applied to taxes due or other debts. In some cases, the exclusion only resulted in a reduction in their adjusted gross income.
The IRS mailed letters to affected taxpayers to inform them of agency corrections to their returns in light of the UC exemption. If you got one of those notices, keep it in your tax records file.
Overall, the IRS says it corrected approximately 14 million returns. This resulted in nearly 12 million refunds totaling $14.8 billion, with an average refund of $1,232.
That's a lot of figures in connection with UC corrections, and I used the 12 million in this post's headline. But for this week's By the Numbers selection, I'm going with the $14.8 billion in total refunds issued.
Some may have been missed: While the IRS' completion of this massive added tax task is to be lauded, there's a chance it missed a few folks who are due payback on the UC tax they paid.
If that's you, you may need to file an amended 2020 tax return to properly claim the UC exclusion.
And if subtracting the excluded $10,200 from that year's earnings reduces your adjusted gross income, then double check whether your 1040-X also needs to claim tax breaks to which, by virtue of making less money, you're now entitled. That could be one or more of the following six tax credits —
- Earned Income Tax Credit (EITC)
- Recovery Rebate Credit (RRC)
- Additional Child Tax Credit (ACTC)
- American Opportunity Tax Credit (AOTC)
- Premium Tax Credit (PTC)
- Advance Premium Tax Credit
Don't blow off these claims if you're eligible thanks to a change in your earnings. As tax credits, each provides a dollar-for-dollar reduction in any tax you owe. They also are refundable, at least in part in some cases. That means you could get some tax cash back even if your tax liability is zero.
More UC/tax info: You can read more about the 2020 UC changes, the IRS follow-up, and what you might need to do now at IRS.gov's 2020 Unemployment Compensation Exclusion FAQs.
If you do need to amend your 2020 tax year return, either Form 1040 or Form 1040-SR, you can submit that 1040-X electronically using tax filing software.
And if you're unsure about just what was on your 2020 return, check those records in your Online Account (you'll have to set one up if you haven't already), or request a tax account transcript be mailed to you.
You also might find these items of interest:
- Made a tax return mistake? Fix it by X-filing an amended return
- $163 billion in unemployment fraud run up during pandemic
- States forgo federal help to replenish unemployment funds. Why?
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