Normally, any unemployment compensation received is taxable. However, a recent law change allows some recipients to not pay tax on some unemployment compensation received in 2020.
The IRS will automatically refund money to eligible people who filed tax returns reporting unemployment compensation before the recent changes made by the American Rescue Plan. These refunds are expected to begin in May and continue into the summer.
Under the new law, people who earned less than $150,000 in modified adjusted gross income can exclude some unemployment compensation from their income. This means they don't have to pay tax on some of it. People who are married filing jointly can exclude up to $20,400 – up to $10,200 for each spouse who received unemployment compensation. Everyone else can exclude up to $10,200 from their income.
Information for Those Who Already Filed 2020 Tax Returns
This law change occurred after some people filed their 2020 taxes. For those who already filed their 2020 tax return based on the full amount of unemployment compensation, the IRS will determine the correct taxable amount of unemployment compensation. Any resulting overpayment of tax will be either refunded or applied to other taxes owed.
The IRS will do these recalculations in two phases:
First, people who are eligible to exclude up to $10,200.
Second, those married filing jointly who are eligible to exclude up to $20,400, and also others with more complex returns.
You only need to file an amended return if the recalculations make you newly eligible for additional federal tax credits or deductions not already included on your original tax return.
For example, the IRS can adjust returns for those who claimed the earned income tax credit and, because the exclusion changed their income level, may now be eligible for an increase in the EITC amount.
However, you would have to file an amended return if you did not originally claim the EITC or other credits but are now eligible to claim them following the change in the tax law. You can use the EITC Assistant to see if you qualify for this credit based upon your new taxable income amount. If you now qualify, you should consider filing an amended return to claim this money.
You may want to review your state tax returns also.
Information for Those Who Haven't Filed 2020 Tax Returns Yet
Tax preparation software has been updated to reflect these changes. If you haven't filed yet and you choose to file electronically, you'll just need to respond to the related questions when preparing your tax returns, and read the New Exclusion of up to $10,200 of Unemployment Compensation for information and examples.
If you choose to file a paper return, refer to the instructions and updated worksheet about the exclusion.