Due to the coronavirus pandemic, millions of Americans filed unemployment insurance claims last year. Some 9.5 million workers lost their jobs and more than four million have been out of work for half a year or longer.
Now with the 2020 income tax filing deadline quickly approaching—it was extended from the usual April 15 to May 17—it is time to consider how that will impact refunds.
Americans who received a federal tax break on their unemployment insurance last year may still have to file an amended return, however, at least to receive their full refund—if they actually overpaid.
Where it gets confusing is that taxpayers don’t have to file an amended return unless the unemployment tax break actually makes them eligible for certain tax benefits. This could include the Earned Income Tax Credit, which is a refundable tax credit meant specifically for low- to moderate-income working individuals and couples, notably those who have children.
This could also include taxpayers who filed their federal and state tax returns before the American Rescue Plan became law this past March. Part of the $1.9 trillion stimulus package was the inclusion of a new tax break for the tens of millions of workers who received unemployment benefits in 2020 after businesses were forced to shutter and lay off employees due to the pandemic.
In the past, unemployment insurance was treated as taxable income and many would have owed federal income taxes on those benefits. However, the American Rescue Plan allowed each taxpayer who earned less than $150,000 in adjusted gross income to exclude unemployment compensation up to $20,400 if married and filing jointly, or $10,200 for individual filers.
The legislation specifically excluded 2020 unemployment benefits from taxes, so as a result beginning in May those who filed their returns without claiming the next tax break should receive an additional refund. The IRS will recalculate returns and incorporate the $10,200 exclusion as either a refund or apply it to other taxes that may be owned.
Additionally, taxpayers who had filed their returns before the plan became law in March may need to file an amended state tax return in order to receive their state refund.
However, it is also understood that some states have still opted to tax the unemployment benefits, and tax experts suggest that taxpayers file an amended form for their federal taxes to receive the extra tax credits that were not claimed in an original return. Tax preparer H&R Block has reported that thirteen states—including Colorado, Georgia, Hawaii, Idaho, Kentucky, Massachusetts, Minnesota, Mississippi, North Carolina, New York, Rhode Island, South Carolina and West Virginia—aren’t excluding unemployment compensation from taxes. A few other states specifically have excluded unemployment income from state tax, while others offer a partial tax break on benefits.
Peter Suciu is a Michigan-based writer who has contributed to more than four dozen magazines, newspapers and websites. He regularly writes about military small arms, and is the author of several books on military headgear including A Gallery of Military Headdress, which is available on Amazon.com.