Normally when you receive unemployment compensation the full amount is considered taxable income, but the rules are different this year. The American Rescue Plan included a new unemployment compensation exclusion to give recipients a much-needed break on their 2020 tax return. The problem is that millions of taxpayers had already filed before the tax break went into effect. To rectify the situation, the IRS plans to recalculate their returns and automatically issue refunds if necessary. The IRS will start issuing those refunds in May. Here’s what you need to know.
What are the unemployment compensation exclusion rules?
Taxpayers with a modified adjusted gross income of $150,000 or less can exclude up to $10,200 of unemployment benefits on their federal tax return. If you’re married filing jointly and both spouses collected unemployment, you can exclude up to $20,400 of benefits.
I already filed. Do I need to amend my return?
There’s no need to amend your return to claim the exclusion if you’ve already filed. The IRS will automatically recalculate the taxes on your benefits starting in May. Based on their results, you’ll either receive an additional refund or they’ll apply the difference to your tax bill.
What if I still need to file?
ezTaxReturn’s tax software has already been updated to reflect all the latest changes. So, whether you need to claim the unemployment compensation exclusion or amend your return to claim additional tax breaks, we can help. It’s fast, easy and you’ll get the biggest possible refund, guaranteed.
One last piece of advice
Right now, the exclusion is only good for unemployment benefits received in 2020. So, if you’re still collecting unemployment you may have to pay taxes on the full amount in the future. Request to have taxes withheld from your pay to avoid a large tax bill when you file in 2022.