Tax Overpayments for Unemployment Recipients Automatically Refunded

New legislation will enable the IRS to automatically refund money to people who filed tax returns and reported unemployment compensation before recent changes in the American Rescue Plan.

The legislation, signed March 11, allows taxpayers who earned less than $150,000 in modified adjusted gross income to exclude unemployment compensation up to $20,400 if married filing jointly and $10,200 for all other eligible taxpayers.

It only applies to 2020 unemployment benefits.

Because the change happened after some people filed their taxes, the IRS will take steps in the spring and summer to make the appropriate change to their return, which may result in a refund.

The first refunds are expected in May and will continue into the summer.

Taxable Amount

For taxpayers who already filed and calculated their tax based on the full amount of unemployment compensation, the IRS will determine the correct taxable amount.

Any resulting overpayment of tax will be either refunded or applied to other outstanding taxes owed.

For those who already filed, the IRS will conduct recalculations in two phases: First with taxpayers eligible for the up to $10,200 exclusion, then it will adjust returns for those married filing jointly taxpayers who are eligible for the up to $20,400 exclusion and others with more complex returns.

There is no need for taxpayers to file an amended return unless the calculations make the taxpayer newly eligible for additional federal credits and deductions not already included on the original tax return.

For example, the IRS can adjust returns for those taxpayers who claimed the Earned Income Tax Credit and, because the exclusion changed the income level, may now be eligible for an increase in the EITC amount, which may result in a larger refund.

Amended Return

Taxpayers will have to file an amended return if they did not originally claim the EITC or other credits but now are eligible because the exclusion changed their income.

These taxpayers may want to review their state tax returns as well.

According to the U.S. Bureau of Labor Statistics, over 23 million U.S. workers filed for unemployment last year, and for the first time, some self-employed workers also qualified for unemployed benefits.

The IRS is working to determine how many workers affected by the tax change already have filed their tax returns.

The new IRS guidance also includes details for those eligible taxpayers who have not yet filed.