Personal Finance

Amended return may be needed to get full refund on $10,200 unemployment tax break, IRS says

Key Points
  • Some taxpayers who collected unemployment benefits in 2020 and filed their returns in the early days of the tax season may have to file an amended return to get their maximum refund.
  • That will be the case if a new tax break on up to $10,200 of unemployment benefits makes them newly eligible for income-dependent tax credits and deductions like the earned income tax credit.
  • President Joe Biden signed the American Rescue Plan, a $1.9 trillion Covid relief bill, about a month into tax season.
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The IRS is automatically recalculating and refunding money to Americans who filed their tax returns without claiming a new tax break on unemployment benefits.

However, taxpayers will have to file an amended tax return, in some cases, to get their maximum refund.

That situation applies to people who, thanks to the unemployment tax break, become newly eligible for other federal tax credits and deductions that weren't claimed on their initial tax return, according to the IRS.

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Such individuals may want to review their state returns, as well, the agency said.

$10,200 unemployment tax break

The American Rescue Plan waived federal tax on up to $10,200 of unemployment benefits, per person, received in 2020.

However, President Joe Biden signed the $1.9 trillion Covid relief measure on March 11 — about a month into tax season.

The tax break may make some households eligible for tax breaks that they hadn't qualified for based on their income when they'd originally filed their taxes.

U.S. adds 916,000 jobs in March, unemployment falls to 6%
U.S. adds 916,000 jobs in March, unemployment falls to 6%

That's because the tax break technically excludes benefits from a taxpayer's income, thereby reducing the income on which they pay tax.

That income reduction may make them eligible for income-dependent tax breaks like the Earned Income Tax Credit, according to the IRS.

"It's not a judgment call," Henry Grzes, lead manager of the tax practice and ethics team at the American Institute of Certified Public Accountants, said. "It's a pure exercise in arithmetic."

Amended tax return

Filing an amended return isn't a requirement — but people may be leaving money on the table if they don't, Grzes said.

Taxpayers don't have to file an amended return immediately. They will generally have up to three years from this year's tax deadline (May 17) to do so, Grzes said.

It's unclear how many taxpayers may have to file an amended tax return to maximize their refund. The IRS didn't respond to a request for comment.

The agency will start issuing refunds automatically starting in May and continue into the summer, the IRS said Wednesday.

About 40 million people collected unemployment benefits in 2020, according to the Century Foundation. The average person received $14,000.

The unemployment tax cut is not available to taxpayers whose modified adjusted gross income is $150,000 or more. That income ceiling is the same regardless of filing status (like single or married) but the calculation excludes jobless benefits.

Earned income tax credit

Aside from the earned income credit, there aren't many tax breaks for which unemployed individuals would likely be newly eligible, Grzes said. They may also qualify for the child and dependent care credit, for example, he said.

The earned income tax credit is a refundable tax credit available to taxpayers who received certain types of income in 2020, like wages and self-employment income. Income eligibility and amount vary based on number of kids.

The maximum credit is $538 for taxpayers with no children. That maximum is $6,660 for taxpayers with three or more qualifying kids.

Single filers without kids can claim the earned income tax credit if their adjusted gross income is less than $15,820. A filer with three kids can earn up to $50,594 and be eligible.

Married joint filers with no kids are eligible with up to $21,710 of income; that rises to $56,844 for joint filers with three kids.

The IRS can automatically adjust returns for those taxpayers who initially claimed the earned income credit and may now be eligible for an increase in the credit amount (and a potentially larger refund). In other words, no amended tax return would be necessary in this case.

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