IRS plans to issue unemployment refunds in May

The Internal Revenue Service said Wednesday it plans to take steps to automatically refund money starting in May and continuing through the summer to taxpayers who filed tax returns reporting unemployment compensation prior to recent changes under the American Rescue Plan.

The COVID relief package, which President Biden signed into law this month, enables taxpayers who earned under $150,000 in modified adjusted gross income to exclude unemployment compensation up to $20,400 if they’re married filing jointly, or $10,200 for all other eligible taxpayers. The relief package excludes only 2020 unemployment benefits. However, that change happened after some people already filed their taxes early this season, so the IRS said it will take steps in the spring and summer to figure the appropriate change to their return, and that could result in a refund.

The first refunds are anticipated to go out in May and will continue into the summer.

Some tax preparers worried they might need to file amended returns for their clients who filed early this tax season, which would have produced even greater confusion and work during an already hectic tax season. But the IRS earlier this month urged taxpayers and preparers not to file amended returns and to wait for the guidance that came out Wednesday.

“For those 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,” the servie said. “Any resulting overpayment of tax will be either refunded or applied to other outstanding taxes owed.”

For taxpayers who have already filed, the IRS will take care of the recalculations in two phases, starting with those taxpayers who are 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 said there’s 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 can adjust returns for taxpayers who claimed the Earned Income Tax Credit, for instance, and because the exclusion changed the income level, they may now be eligible for an increase in the EITC amount which may result in a larger refund. On the other hand, 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. Those taxpayers may wish to review their state tax returns as well, the IRS suggested.

More than 23 million U.S. workers filed for unemployment in 2020, according to the U.S. Bureau of Labor Statistics. For the first time, some self-employed workers also qualified for unemployed benefits. The IRS said it’s working to find out how many workers affected by the tax change have already filed their returns. The new IRS guidance also includes details for eligible taxpayers who haven’t yet filed their returns.

The IRS has also been working with the tax prep software industry to include the latest updates so people who file electronically only need to answer the related questions when doing their taxes. For more details and examples, see the New Exclusion of up to $10,200 of Unemployment Compensation page on IRS.gov. For others, instructions and an updated worksheet about the exclusion were available in March and posted to IRS.gov/Form 1040. The updated instructions there can help taxpayers who haven’t yet filed to prepare their returns the right way.