IRS begins correcting tax returns for unemployment funds


WASHINGTON – The Internal Revenue Service will begin issuing reimbursements this week to eligible taxpayers who paid taxes on 2020 unemployment benefit, which the recently passed US bailout later excluded from taxable income.

The IRS identified over 10 million taxpayers who filed their tax returns before the US rescue plan of 2021 went into effect in March and reviews those tax returns to determine the correct taxable amount for unemployment benefits and taxes. This may result in a refund, reduced balance, or no change in tax (no refund due or amount owed).

These corrections are made automatically, step by step, to ease the burden on taxpayers. The first phase is underway and involves the simplest of returns. The next phase will include the more complex tax returns that the IRS is expected to need to review and correct by the end of the summer.

The first phase of adjustments is made for individual taxpayers who have had the simplest tax returns, e.g. B. for taxpayers who did not claim children or refundable tax credits.

The IRS will issue direct deposit refunds from these efforts to taxpayers who have provided bank account information on their 2020 tax returns. If valid bank account information is not available, the refund will be sent as a check to the address provided. The IRS will continue to send refunds until all identified tax returns have been reviewed and adjusted.

These refunds are subject to normal set-off rules such as federal overdue taxes, state income taxes, state debt for unemployment benefits, child support payments, spouse benefits, or certain federal non-taxable debt (i.e. student loans). The IRS will send a separate notice to the taxpayer if the refund is being used to settle unpaid debts.

The IRS sends taxpayers a note explaining the corrections they should expect within 30 days of the correction. Taxpayers should keep all communications they receive for their records. Taxpayers should review their tax returns after receiving their IRS notice (s).

Corrections to an Earned Income Tax Credit (EITC) without qualified children and the Recovery Rebate Credit are made automatically as part of this process. However, some taxpayers may be eligible for certain income-based tax credits that are not claimed on their original tax return, such as: B. the EITC for their qualified children. If so, they should file an amended tax return if they receive additional benefits based on the revised Adjusted Gross Income.

More complex corrections begin after the first phase is completed and involve married couples filing together as a marriage.

Unemployment benefit is taxable income. The American bailout plan excludes the 2020 unemployment benefit of $ 10,200 from income used to calculate the amount of tax owed. The $ 10,200 per person exclusion applies to taxpayers who are single or married and who jointly submit a modified gross adjusted income of less than $ 150,000. The $ 10,200 is the exclusion amount, not the refund amount. Refund amounts will vary and not all adjustments will result in a refund.

The legislation also overrides the obligation to repay any excess upfront premium tax credit (APTC excess). If a taxpayer paid an APTC refund amount when filing their 2020 tax return, the IRS will automatically refund that amount. If the IRS adjusts the taxpayer’s account to reflect the unemployment income exclusion, the excess APTC amount paid by the taxpayer will be included in that adjustment. The IRS is also adjusting accounts for those who paid off excess APTC but did not include unemployment benefits on their 2020 tax returns.

Taxpayers who have not yet filed a tax return should follow the guidelines on Forms 1040 and 1040-SR, which detail how to exclude unemployment benefits.

For more information

  1. Tax treatment of unemployment benefits
  2. Frequently asked questions about exclusion from unemployment benefits
  3. Tax year 2020: The obligation to repay excess advance payments of the premium tax credit is suspended

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