IRS: Extra refund checks for $10,200 unemployment tax break will start going out in May

"The first refunds are expected to be made in May and will continue into the summer," the IRS said.

U.S. Treasury check
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If you received unemployment benefits in 2020 and filed your federal taxes soon after tax season opened this year, be on the lookout for an automatic extra refund check from the IRS as early as May, the tax agency announced Wednesday.

What's behind the payment: the American Rescue Plan, which President Joe Biden signed into law March 11. The stimulus package retroactively waived federal taxes on the first $10,200 worth of unemployment aid received in 2020. Married taxpayers filing jointly can exclude up to $20,400. The exemption only applies to tax filers who made less than $150,000 last year, whether they are filing as single or married.

The new tax break came into play almost a month after tax season began. By mid-March, the IRS had already received more than 66 million returns.

The IRS confirmed Wednesday that it will issue refunds automatically to many eligible taxpayers who had already filed their federal returns without claiming the unemployment tax break. There is no need for most affected taxpayers to file an amended return, the agency said.

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"Because the change occurred after some people filed their taxes, the IRS will take steps in the spring and summer to make the appropriate change to their return, which may result in a refund," the IRS said in its statement. "The first refunds are expected to be made in May and will continue into the summer."

The IRS will either refund taxpayers who overpaid or apply the amount to outstanding taxes owed. The recalculation will be completed in two phases, the agency said, starting with simpler returns in its first round of adjustments and moving on to joint filers and more complex returns in the second round of calculations.

The size of your extra refund check depends on what you earned

Approximately 40 million Americans received unemployment benefits last year, according to the Century Foundation. The average recipient got $14,000.

How big a refund check you might get depends on factors including how much you earned, your filing status, and other tax breaks you might have claimed.

Let's say you're married, filing jointly, and your adjusted gross income last year was $78,500 (which was the median family income in 2020, according to the U.S. Department of Housing and Urban Development). That puts you in the 12% tax bracket.

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If you filed before the unemployment tax break was available and took the standard deduction, retroactively excluding $10,200 worth of unemployment aid from your adjusted gross income could result in a refund of around $1,200.

"The only other issue that could affect the exact number would be any other tax credits that a taxpayer can apply for in 2020 that have a phase-in or phase-out with the increase and decrease in taxable income," says John Wheeler, a CPA and senior financial consultant at Castle Wealth Advisors in Indianapolis.

In other words, you might be eligible for an even bigger refund if you claimed a tax credit or deduction on your initial federal return that phases out at higher incomes, he says. The IRS has said it will recalculate the value of such credits when it adjusts taxpayers' returns to factor in the unemployment tax break.

When you do need to file an amended return

Most taxpayers affected by the new unemployment tax break do not need to file amended returns. The exception: If the break's reduction in your taxable income makes you newly eligible for additional federal credits and deductions not already included on your original tax return, the IRS said.

Specifically, the unemployment tax break could make you eligible for credits like the Earned Income Tax Credit. In that case, you must file an amended return to claim the credit and you should review your state tax returns as well, the tax agency said.

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Your state may not follow federal tax changes

The American Rescue Plan's $10,200 tax break on jobless aid only applies to federal income tax. Depending on where you live, you may also need to pay state or local taxes on your unemployment benefits. At the federal level, unemployment is normally taxed as ordinary income, but tax rates vary state by state. Some states don't count unemployment benefits as income.

As of Tuesday, more than a dozen states weren't offering a tax break on unemployment benefits.

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