IRS to recalculate taxes on 2020 unemployment benefits, and automatically to issue refunds

IRS to recalculate taxes on 2020 unemployment benefits

The IRS today announced that it will “take steps to automatically refund money this spring and summer” to individual taxpayers who filed their tax returns and reported unemployment compensation as taxable income before enactment of legislation in March 2021 that excludes from income tax unemployment benefits received in 2020.

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The American Rescue Plan (enacted March 11, 2021) allows individual taxpayers who earned less than $150,000 in modified adjusted gross income in 2020 to exclude unemployment compensation in amounts of up to $20,400 if married filing jointly and $10,200 for all other eligible taxpayers.

As explained in the IRS release—IR-2021-71 (March 31, 2021)—because the legislative change was enacted after some taxpayers had filed their tax returns, the IRS announced it will make the appropriate change to the tax returns and that this may result in refunds for certain taxpayers.

  • The first refunds are expected to be made in May 2021 and will continue into the summer.
  • For those taxpayers who already have filed and determined their taxes based on the full amount of unemployment compensation, the IRS will determine the correct taxable amount of unemployment compensation and tax. Any resulting overpayment of tax will be either refunded or applied to other outstanding taxes owed.
  • For those taxpayers who have already filed, the IRS will perform these recalculations in two phases, starting with those taxpayers eligible for the up-to-$10,200 exclusion. The IRS will then adjust returns for those married filing jointly taxpayers who are eligible for the up-to-$20,400 exclusion and others with more complex returns.

The IRS release states that taxpayers do not need 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 instance, the earned income tax credit (EITC)). 

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