Personal Finance

TurboTax, H&R Block update software to account for $10,200 unemployment tax break

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Key Points
  • TurboTax and H&R Block updated their online software to account for a new tax break on unemployment benefits received in 2020.
  • The American Rescue Plan, a $1.9 trillion Covid relief bill signed this month by President Joe Biden, waived federal tax on up to $10,200 of jobless benefits per person.
  • State returns may still pose a problem for e-filers.
An H&R Block office in San Francisco, Calif.
David Paul Morris/Bloomberg via Getty Images

TurboTax and H&R Block updated their online software to account for a new tax break on unemployment benefits received last year, according to company officials.

However, state tax returns may still be a source of trouble for some taxpayers filing electronically.

The American Rescue Plan excludes up to $10,200 of unemployment benefits collected in 2020, per person, from federal tax. President Joe Biden signed the $1.9 trillion Covid relief measure on March 11.

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Around 40 million Americans received jobless aid last year, according to the Century Foundation. The average person received $14,000.

People who made $150,000 or more of income last year are not eligible for the tax cut. That threshold is the same regardless of filing status like single or married.

Tax preparers like H&R Block and TurboTax needed time to tweak their systems appropriately and incorporate the law. They also had to wait for the IRS to issue guidance on how workers can claim the tax break. TurboTax processed nearly 40 million tax returns last year.

More than 7 million individuals used H&R Block software to file their taxes last year.

H&R Block was able to process returns beginning Friday for people eligible for the federal tax waiver, according to company spokeswoman Lisa Patterson.

"Whether using our DIY products or working with a tax pro, our services are updated to handle this tax change on federal returns," Patterson said.

TurboTax plans to issue an update for its desktop software on Friday, a spokeswoman said.

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A spokesperson for the Free File Alliance, a group of nine firms that partner with the IRS to offer free electronic tax filing, didn't immediately return a request for comment. (IRS Free File is available to taxpayers whose adjusted gross income is $72,000 or less.)

The IRS advised taxpayers who already filed their tax returns for 2020, but who are eligible for the break on unemployment income, not to file an amended tax return to claim the benefit.

The agency is working on a fix and plans to automatically process refunds for eligible individuals.

"Once the IRS provides more direction, we'll help our clients get the refund due," Patterson said.  

State tax returns

State tax returns still seem to be a source of trouble for some people filing returns online.

Bob Loiacono, 60, a do-it-yourself tax filer, also prepares taxes for a number of family members every year.

The Whitefield, New Hampshire, resident used H&R Block software to file a joint tax return last week for a cousin and her husband, who received unemployment income.

The federal return was accepted but their Massachusetts state return was rejected. An H&R Block phone representative determined that a negative number (-10,200) on the tax return caused the problem, Loiacono said of their conversation.

Thirty-five states and the District of Columbia typically tax unemployment benefits as income. (Three states — Arkansas, Delaware and Maryland — usually do, but waived the tax for 2020.)

Many states haven't determined how they will handle the new tax waiver, which applies at the federal level but not the state level.

"It's still a question of how do I file the state return," Loiacono said of the situation.

"We'll hold off for a week and see what happens," he added. "But at some point [my cousin] will have to file a return, whether it's paper or not."

The IRS extended the tax deadline to May 17. Massachusetts adopted the same deadline.

"Many states are still determining if and how they will align with the federal unemployment income exclusion. As they do, H&R Block is updating its services," Patterson said.

The Massachusetts Department of Revenue didn't immediately respond to a request for comment.