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Unemployment Tax Refunds Are Being Sent to People Who Overpaid Their Taxes

IRS Prepares to Send 4 Million Refunds for Unemployment Compensation Overpayments

Last week, the IRS announced that it’s issuing another round of tax refunds to nearly 4 million taxpayers who overpaid their taxes on unemployment compensation received last year. This has been happening because of the new tax exclusion for unemployment benefits, which was introduced by the American Rescue Plan Act of 2021 in March.

This article provides information about unemployment tax refunds, as well as the new tax exclusion for unemployment compensation, based on recent IRS news releases.

Unemployment Tax Refunds

According to the IRS, tax refunds by Direct Deposit will begin July 14 and refunds by paper check will begin July 16. Note that the IRS previously issued refunds related to the unemployment compensation exclusion in May and June, and it will continue to issue refunds throughout the summer.

To ease the burden on taxpayers, the IRS has been reviewing Forms 1040 and1040-SR that were filed prior to the law’s enactment to identify those people who are due an adjustment. For taxpayers who overpaid, the IRS will either refund the overpayment, apply it to other outstanding taxes, or other federal or state debts owed.

For this round of reviews, the IRS has identified approximately 4.6 million taxpayers who may be due an adjustment. Of that number, approximately 4 million taxpayers are expected to receive a tax refund. The refund average is $1,265, which means that some people will receive more and some will receive less.

In general, taxpayers will receive letters from the IRS within 30 days of the adjustment to inform them of what kind of adjustment was made (such as a refund, payment of IRS debt payment, or payment offset for other authorized debts) and the amount of the adjustment.

RELATED: How Does the American Rescue Plan Act (ARPA) Affect Your Taxes?

New Tax Exemption for Unemployment Compensation

The American Rescue Plan Act (ARPA) was signed into law by President Biden on March 11, 2021. This bill was designed to help the millions of Americans who continue to struggle to find work due to COVID-19 and it makes a lot of changes to pandemic-related federal unemployment insurance benefits.

The American Rescue Plan Act includes a new tax break on unemployment benefits that were received during 2020. Typically, unemployment benefits are treated as regular income and are considered taxable – but the ARPA provision allows taxpayers to exclude the unemployment compensation they received in 2020, up to a certain limit.

The exclusion allows up to $10,200 of 2020 unemployment compensation to be excluded from taxable income calculations. That means the first $10,200 of unemployment compensation you received in 2020 will not be subject to federal income tax. The exclusion applies to individuals and married couples whose modified adjusted gross income (MAGI) was less than $150,000 in 2020.

This unemployment tax break can be claimed on your 2020 federal tax return (Form 1040 or Form 1040-SR), but it does not necessarily apply to your state income taxes. You should check with your state’s tax agency to see if they are offering a similar tax break for the unemployed.

RELATED: Changes to Unemployment Benefits Under the CARES Act

Should You File an Amended Tax Return?

The IRS says that most taxpayers do not need to take any action and there is no need to call the IRS.

However, if you are now eligible for tax deductions or credits (as a result of the excluded unemployment compensation) that were not claimed on your original tax return, you should file a Form 1040-X (Amended U.S. Individual Income Tax Return).

According to the IRS, taxpayers should file an amended return if they:

  • Did not submit a Schedule 8812 with the original return to claim the Additional Child Tax Credit and are now eligible for the credit after the unemployment compensation exclusion
  • Did not submit a Schedule EIC with the original return to claim the Earned Income Tax Credit (with qualifying dependents) and are now eligible for the credit after the unemployment compensation exclusion
  • Are now eligible for any other credits and/or deductions not mentioned below (make sure to include any required forms or schedules)

Taxpayers do not need to file an amended return if they:

  • Already filed a tax return and did not claim the unemployment exclusion; the IRS will determine the correct taxable amount of unemployment compensation and tax
  • Have an adjustment, because of the exclusion, that will result in an increase in any non-refundable or refundable credits reported on the original return
  • Did not claim the following credits on their tax return but are now eligible when the unemployment exclusion is applied: Recovery Rebate Credit, Earned Income Credit with no qualifying dependents or the Advance Premium Tax Credit. The IRS will calculate the credit and include it in any overpayment
  • Filed a married filing joint return, live in a community property state, and entered a smaller exclusion amount than entitled on Schedule 1, line 8

Remember that in addition to the new unemployment tax exclusion, the American Rescue Plan Act also creates a third round of stimulus checks for eligible individuals. The payments are distributed by the IRS via Direct Deposit, paper checks, or prepaid debit card, depending on the recipient. If you want to find out the status of your stimulus check, you can use the IRS “Get My Payment” online tool.

The third round of stimulus checks is worth up to $1,400 per person or $2,800 for a married couple that files taxes jointly. (The first round of stimulus checks was worth up to $1,200 per person and the second round of checks was worth up to $600 per person.) Households with dependents receive an additional $1,400 for each dependent.

>> Check the Status of Your Stimulus Payment

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