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Regulation and Compliance > Federal Regulation > IRS

IRS to Refund Taxes Paid on 2020 Jobless Benefits

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What You Need to Know

  • The American Rescue Plan exempts some unemployment benefits from taxes.
  • Taxpayers don't need to file an amended return unless the change qualifies them for additional tax benefits.
  • Bureau of Labor Statistics found that over 23 million U.S. workers nationwide filed for unemployment last year.

The Internal Revenue Service plans to automatically refund money this spring and summer to people who filed their tax return reporting unemployment compensation before the recent changes made by 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, the IRS explains.

The legislation excludes only 2020 unemployment benefits from taxes.

“Because the change occurred 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 IRS said.

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

For taxpayers who already have filed and figured their tax 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,” the IRS said.

For those who have already filed, the IRS will do these recalculations in two phases, starting with those taxpayers eligible for the exclusion of up to $10,200.

The IRS will then adjust returns for married taxpayers filing jointly who are eligible for the exclusion of up to up to $20,400, along with 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,” the IRS said.

“For example, the IRS can adjust returns for those taxpayers who claimed the Earned Income Tax Credit (EITC) 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. However, taxpayers would 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,” the agency stated.

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

The IRS cites the Bureau of Labor Statistics, which found that over 23 million U.S. workers nationwide filed for unemployment in 2020.

“For the first time, some self-employed workers qualified for unemployed benefits as well,” the IRS said.

The IRS said it 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.