IRS to Recalculate Taxes on Unemployment Benefits
The IRS announced plans to begin correcting 2020 individual tax returns that reported unemployment compensation prior to the recent changes in the American Rescue Plan.
Under the new law, the first $10,200 of unemployment compensation received in 2020 is excluded from taxable income for taxpayers with less than $150,000 of modified adjusted gross income. For married filing jointly taxpayers, the amount is doubled to $20,400 of unemployment compensation. Prior to the new rules signed into law on March 11, 2021, all unemployment compensation received was treated as fully taxable on an individual’s tax return.
Taxpayers who have already filed their 2020 tax returns with unemployment compensation reported will have their returns automatically adjusted to comply with the new rules. The automatic recalculation will begin in May. No amended returns need to be filed for claiming this updated tax benefit unless the change results in credits or deductions that were not able to be claimed on the original return.
If the adjustments result in an overpayment of tax on the original return, the IRS will refund the excess or applied to any other outstanding taxes due from previous years. The adjustments will happen in two phases, first those who qualify for the $10,200 exclusion and then followed by those who qualify for the larger exclusion or have multiple credit adjustments based on newly adjust taxable income.
The impact of the exclusion of portions of unemployment compensation should also be reviewed on your state tax returns.