IRS Correcting Tax Returns for Unemployment Income Exclusion

Over 10 million taxpayers filed their tax returns before the American Rescue Plan was enacted this past March, which excluded some unemployment income from being counted as taxable income. Read on to see what the IRS is doing about these returns…..

The IRS has released the following guidance for those who had excludable unemployment compensation not reflected on their tax returns, due to being filed prior to the American Rescue Plan being signed into law.

• Do NOT file amended returns in order to adjust your taxes to reflect the unemployment compensation change
• The IRS will automatically adjust returns to reflect the changes put into effect in March
• As of late May, the IRS already began issuing refunds to eligible taxpayers who paid taxes on 2020 unemployment compensation that the American Rescue Plan later excluded from taxable income

The above changes are being made automatically in a phased approach, with the simplest returns being part of phase one (which has already begun). This includes returns for single taxpayers and those who did not claim any children or refundable tax credits.
 
The subsequent IRS review phases involve more complex tax returns, and will take the IRS through the end of summer to review and correct.
 
These refunds will be issued either by direct deposit for taxpayers who provided bank account info on their 2020 tax return, or will be mailed as a paper check to the address on record.
 
As a reminder, the American Rescue Plan excluded $10,200 in 2020 unemployment compensation from income for those earning less than $150,000. This $10,200 exclusion is per person and is a reduction in taxable income from unemployment compensation, not a direct tax credit.

Contact us if you have questions as it pertains to your specific situation…we’re happy to help!