The IRS will start issuing extra refund checks on 2020 unemployment benefits later this month. And some taxpayers will get their money sooner than others.
The American Rescue Plan, which President Joe Biden signed into law March 11, retroactively waived federal taxes on the first $10,200 worth of unemployment aid received per person in 2020. Married taxpayers filing jointly can exclude up to $20,400 if both received unemployment. The exemption only applies to tax filers who made less than $150,000 last year, whether they are filing as single or married.
The IRS has a plan to help Americans who filed their 2020 tax returns before the stimulus package became law in mid-March, meaning they weren't able to take advantage of the the tax break. It will automatically re-compute their returns and issue eligible filers an extra refund check.
Last week the agency clarified its timing: "The IRS will perform the corrections starting in late May and continue throughout the summer and into the fall," it wrote on its FAQ page Friday. "Any resulting overpayment of tax will be either refunded or applied to other outstanding taxes owed."
Around 40 million Americans collected jobless benefits last year, according to an analysis by The Century Foundation. The average recipient got $14,000 in assistance, so many taxpayers should be on the lookout for a refund check.
The first phase of unemployment refunds will include single filers, an IRS official told CNBC.
It may be summer before the IRS starts issuing refunds to married couples who file a joint tax return. "Others with more complex tax returns" may also have to wait a few months before receiving their refunds, the IRS official said.
In this case, a "complex" tax return may be one where adjusting for the unemployment tax break in turn requires adjusting "many other calculations and schedules" a filer has claimed, says Mark Prendergast, a CPA and the director of tax strategies at Inspired Financial in Huntington Beach, California.
Most taxpayers affected by the 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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Claiming the unemployment tax 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.
To find out how your state plans to tax unemployment benefits, experts suggest visiting its tax agency's website for details. And depending on the complexity of your tax situation, it might make sense to hire a tax professional this season.
Waiting for your extra refund isn't easy, especially when 73% say this year's tax refund is important to their financial health, according to a recent CreditCards.com survey. But taking action by amending your return won't help speed things up, according to Prendergast. "For most cases, I think it's better to wait for the [unemployment] refund and then test the calculation. If it's wrong, then you can amend to claim a bigger refund," he says.
"I am certainly not an IRS apologist," he adds, "but I have to believe that they will get it right for 90%-plus of tax filers who claimed unemployment benefits."
Amending a tax return can be a complicated process, too. "For those who 'do it yourself,' a small error can result in it getting bounced and you start from square one," Prendergast warns. "If you pay a professional to prepare the amended tax return, that could cost hundreds of dollars, which could be a large percentage of the refund."
If you filed an amended federal tax return in order to claim the unemployment tax break even though it wasn't necessary to do so, don't worry. "Filing a Form 1040-X [an amended federal tax return] won't increase the time it takes the IRS to make the automatic correction or reduce the time it takes to process your automatic correction," the IRS said.
The tax agency says it will be able to identify a duplicate claim or mixed adjustment scenarios.
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