To collect the $10,200 unemployment tax break, you may need to amend your state tax return: Here's how

"Every state is different. That's one of the challenges."


If you collected unemployment benefits last year, you may be eligible for a tax break on up to $10,200 of the money you received, thanks to the new stimulus plan. But if you've already filed your taxes, you may need to amend your state return to get the full benefit.

The American Rescue Plan, which President Joe Biden signed into law March 11, waives federal taxes on the first $10,200 worth of unemployment aid received in 2020. Married taxpayers filing jointly are able to exclude up to $20,400. Many states are offering the break on state taxes, too.

Because the relief package was signed into law about a month into tax season, many people had already filed their returns without taking advantage of the tax break.

On a federal level, the IRS has a plan to remedy the issue. Starting in May, the tax agency is automatically issuing federal tax refunds to eligible taxpayers who filed before the tax break went into effect. If you're among those affected, you won't have to amend your federal tax return to claim the benefit, unless the additional unemployment tax break makes you newly eligible for other tax benefits, like the Earned Income Tax Credit (EITC).

Claiming the break at the state level may be a bit trickier. Even if your state has adopted the unemployment tax break, it may not be automatically issuing a refund to taxpayers for the difference. That means if you filed early this spring, you may have to submit an amended state tax return.

Here's what you need to know to proceed.

States where there is no unemployment tax break

So far, 11 states have said they aren't adopting the federal unemployment tax cut, according to H&R Block data: Colorado, Georgia, Hawaii, Idaho, Kentucky, Minnesota, Mississippi, North Carolina, New York, Rhode Island, and South Carolina.

If you live in one of those 11 states and you filed your taxes after the American Rescue Plan was passed, you should not have excluded your unemployment benefits from your taxable income. If you did, you'll need to file an amended return to remedy the issue, says Henry Grzes, lead manager for tax practice and ethics at the American Institute of Certified Public Accountants.

Other states don't tax unemployment benefits, including Alabama, New Hampshire, and New Jersey. So there's no need to take further action with your return.

Some states will require an amended return to get the tax break

In several states, some additional legwork may be required to get the unemployment tax break at the state level. "Now [some] states are saying you're going to need to formally amend your individual state return if you want to take advantage of the exclusion that we retroactively adopted," Grzes says.

West Virginia, New Mexico, and Louisiana are among the states that have agreed to follow the federal unemployment tax break, but they are requiring eligible residents to file amended returns to get it. Other states, like Massachusetts, are allowing residents to take the unemployment tax break without having to file an amended return.

"Every state is different," Grzes says. "That's one of the challenges." To find out how your state plans to tax unemployment benefits, visit its tax agency's website for details.

How to file an amended tax return

To file an amended federal return, you'll need to fill out the three-column Form 1040X. Each state has its own version, which you can obtain through its tax department's website.

On the forms, taxpayers typically copy line items from their original return, noting which should be corrected and the net change. There's a section to explain why you're amending the return, and you should attach any documents supporting the change.

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Under normal circumstances, experts recommend filing amended returns quickly to avoid any tax penalties and get any additional refund more quickly. But if you think you will need to file an amended state tax return due to the unemployment tax break, you might be better off waiting until you receive confirmation of your additional federal refund from the IRS.

Some states will require you to include the IRS' official notice stating you've received the added federal tax break, "because that's the proof the state is going to need, that the IRS signed off on it," Grzes explains.

If you're expecting extra money back from the state, it could be a while. At the federal level, amended tax returns have a "normal" processing time of up to four months, according to the IRS website, and some states may have similar timelines. Considering this is far from a normal tax season, those wait times could be even longer.

Ultimately, your situation will depend on where you live, and hiring a tax professional to sort it out might be worth the money.

"It's a challenging system, and this is where seeking the advice of a professional really is helpful," Grzes says. While it costs money to hire a certified public accountant, "whatever charge you are going to pay is going to be worth it, not only for tax savings, but for the time and effort you might have to spend."

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