Refunds on Unemployment Taxes To Come As Soon As May

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Early tax filers who didn’t get the recently approved tax break on their 2020 unemployment benefits will get their automatic refunds from the IRS as early as May, the agency said Wednesday.

The IRS had already pledged to make the refunds automatic but hadn’t disclosed any timing. The refunds, which will either be issued as a refund or applied to the amount of other outstanding taxes owed, are expected to begin in May and distributed “into the summer,” the IRS said in its new statement. It didn’t specify how those refunds would be given. 

The tax break, included in the $1.9 trillion stimulus package approved earlier this month, waives income taxes on the first $10,200 of unemployment benefits received in 2020 for any taxpayer who earned less than $150,000. But it was passed a month into tax season, so millions of Americans had already filed their tax returns, and therefore, overpaid. Assuming a 10% tax rate, refunds may be as much as $1,020 per person.

In 2020, unemployment, and filing for unemployment insurance, surged after the government shut down all but essential businesses for months to slow the spread of COVID-19. For the first time, many self-employed workers qualified for the benefits too. 

Over 23 million U.S. workers filed for unemployment last year, the IRS said, citing the Bureau of Labor Statistics. It’s still determining how many of those people had filed their tax returns before a new worksheet and software updates were added to reflect the tax change.

Recalculations will be made in two stages, starting with those eligible for the $10,200 exclusion and then moving to married couples who file jointly and are eligible for $20,400, the IRS said.  

The IRS had previously told affected taxpayers not to file amended tax returns. However, there is one scenario in which it could be necessary, the IRS said Wednesday: If excluding $10,200 from taxable income were to make the taxpayer eligible for additional federal credits and deductions not included on the original tax return. 

For example, if the taxpayer’s new income level makes them eligible for a larger Earned Income Tax Credit (EITC) amount, they would have file an amended return to get a larger refund, the IRS said.

The federal tax break doesn’t apply to state income taxes, but some states changed their rules to match the federal change or already excluded unemployment benefits from taxable income. Others aren’t offering the tax break. To see how your state treats these benefits, check H&R Block’s regularly updated state-by-state list.