Candace J. Dixon
The IRS is reviewing tax returns that were filed before the American Rescue Plan of 2021 became law in March to determine the correct taxable amount of unemployment compensation. This could result in adjustments for some people.
These efforts by the IRS to correct unemployment compensation overpayments will help most affected people avoid having to file an amended tax return. Some people will receive refunds, which will be issued periodically, and others will have the overpayment applied to taxes due or other debts. For others, there will be no change.
The American Rescue Plan Act of 2021 excluded up to $10,200 in unemployment compensation paid in 2020 per taxpayer from taxable income. Just because people should not have been taxed on up to $10,200 of the unemployment compensation doesn't mean that's the amount of the refund they will receive.
Other adjustments
The IRS is also making corrections for the earned income tax credit, premium tax credit and recovery rebate credit, which were all affected by the exclusion. They can adjust tax returns for those who are single with no children and who become eligible for EITC. They can also adjust returns where EITC was claimed and qualifying children were identified.
However, people who have qualifying children and become newly eligible for the EITC after the unemployment exclusion is calculated may have to file an amended return to claim any new benefits.
If the IRS adjusts someone’s tax return, the taxpayer will receive a letter in about 30 days, explaining the type and amount of the adjustment that was made. Upon receiving a letter, people should review their tax returns and keep the IRS notices for their records.
Types of adjustments include a refund, a payment of IRS debt, or a payment offset for other authorized debts. Offsets include past-due federal tax, state income tax, state unemployment compensation debts, child support, spousal support ,or certain federal nontax debts, such as student loans.
Additional Resources: Tax Treatment of Unemployment Compensation Unemployment Compensation Exclusion FAQs