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IRS Announces Automatic Refund of Taxes on Unemployment

Posted on Apr. 1, 2021

The IRS has announced plans to automatically refund money to those who reported unemployment income on their 2020 tax returns that’s now excludable under the American Rescue Plan Act.

The American Rescue Plan Act of 2021 (P.L. 117-2), signed by President Biden amid filing season on March 11, allows taxpayers reporting modified adjusted gross income under $150,000 to exclude $10,200 of unemployment benefits — up to $20,400 if married filing jointly — on their 2020 income tax returns.

“Because the change occurred after some people filed their taxes, the IRS will take steps in the spring and summer to make the appropriate change to their return, which may result in a refund,” the IRS said in a March 31 release, which added that the first refunds should be going out in May and continue into the summer.

The IRS said taxpayers don’t need to file amended returns unless they’re newly eligible for more credits and deductions that weren’t included on their original returns.

The IRS said it would adjust the returns of taxpayers who claimed the earned income tax credit, for example, and are eligible for a larger refund because of the exclusion. “However, taxpayers would 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,” it said.

Recalculations will occur in two phases, the release explains, starting with taxpayers eligible for the exclusion up to $10,200, and then adjusting returns for married joint filers eligible for the larger exclusion and others with more complex returns.

National Taxpayer Advocate Erin Collins predicted March 30 that millions of taxpayers who have already filed and paid taxes on 2020 unemployment income would be affected by the legislative change.

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