May 14, 2021
Candace J. Dixon
The Internal Revenue Service will begin issuing refunds this week to eligible individuals who paid taxes on 2020 unemployment compensation that the recently-enacted American Rescue Plan later excluded from taxable income.
The IRS identified over 10 million people who filed their tax returns prior to the American Rescue Plan of 2021 becoming law in March, and is reviewing those returns to determine the correct taxable amount of unemployment compensation. This could result in a refund, a reduced balance due, or no change to tax (no refund due or amount owed).
These corrections are being made automatically in two phases to the burden on taxpayers. The first phase of adjustments underway is being made for single filers who had the simplest tax returns, such as those filed by people who did not claim children or any refundable tax credits. The next phase will include more complex tax returns, including couples married filing jointly, which the IRS anticipates will take through the end of summer to review and correct.
The IRS will issue refunds resulting from this effort by direct deposit for those who provided bank account information on their 2020 tax return. If valid bank account information is not available, the refund will be mailed as a paper check to the address of record. The IRS will continue to send refunds until all identified tax returns have been reviewed and adjusted.
The IRS will send notices explaining the corrections within thirty days of when the correction is made. People should keep any notices they receive for their records and review their return after receiving the IRS notice(s).
These refunds are subject to normal offset rules, such as past-due federal tax, state income tax, state unemployment compensation debts, child support, spousal support or certain federal nontax debts (i.e., student loans). The IRS will send a separate notice to people if the refund is offset to pay unpaid debts.
Correction to any Earned Income Tax Credit (EITC) without qualifying children and the Recovery Rebate Credit are being made automatically as part of this process. However, some people may be eligible for certain income-based tax credits not claimed on their original return, such as the EITC for their qualifying children. If so, they should file an amended tax return if the revised adjusted gross income amount makes them eligible for additional benefits.
Unemployment compensation is normally taxable income. The American Rescue Plan excludes $10,200 in 2020 unemployment compensation from income used to calculate the amount of taxes owed. The $10,200 per person exclusion applies to taxpayers, single or married filing jointly, with modified adjusted gross income of less than $150,000. The $10,200 is the amount of income exclusion, not the amount of the refund. Refund amounts will vary, and not all adjustments will result in a refund.
The legislation also suspends the requirement to repay excess advance payments of the Premium Tax Credit (excess APTC). If an individual paid an excess APTC repayment amount when they filed their 2020 return, the IRS is also refunding this amount automatically. If the IRS corrects an account to reflect the unemployment income exclusion, the excess APTC amount that was paid will be included in the adjustment. The IRS is also adjusting accounts for those who repaid excess APTC but did not report unemployment compensation on their 2020 tax return.
People who have not yet filed a tax return should follow the guidance for Forms 1040 and 1040-SR, which details how to exclude unemployment compensation.