The American Rescue Plan Act was signed in March 2021. It provided several benefits aimed at COVID-19 relief. One of those benefits allowed single taxpayers to exclude $10,200 of unemployment income from their 2020 federal income tax return.
The problem was the law was passed after many people already filed their tax returns. This led people to wonder whether they’ll get refunded automatically or if they’ll have to file an amended tax return. Here’s what is known so far.
What’s Ahead:
How the unemployment income exclusion works
Typically, you have to pay federal income taxes on your unemployment income. However, Congress decided taxpayers needed a break on their 2020 taxes due to COVID-19’s impacts.
In an average year, Congress would pass this before tax season so the IRS had time to update their tax forms. Unfortunately, that didn’t happen this year. In an extraordinary move, this was passed in the middle of tax season. That means millions of taxpayers had already filed their tax returns before this exclusion even existed.
Exclusion amounts
If you haven’t filed your tax return yet, tax software should explain how to claim this exclusion on your 2020 tax return. The tax break allows each person to exclude $10,200 of unemployment income from their federal income tax return.
Married filing jointly taxpayers can have each spouse exclude $10,200 of unemployment income. That said, it isn’t a combined impact. If one spouse had $12,000 of unemployment income and the other spouse had $4,000 of unemployment income, they can only exclude $10,200 of the first spouse’s income and the full $4,000 of the second spouse’s income.
Limits on the exclusion
Congress put a limit on this exclusion. People with a modified adjusted gross income that exceeds $150,000 do not qualify for this benefit. The idea is that people who have a modified adjusted gross income of over $150,000 don’t likely need the tax break on their unemployment income as people with less income might.
Many tax breaks double the income limitation for married filing jointly filers, but this one did not. This limit is the same for single and married filing jointly taxpayers.
How this could impact your tax bill if you haven’t filed yet
Assuming you qualify, this should lower the tax you owe. This could increase your refund, change your balance owed to a refund, or reduce the amount of tax you owe depending on your tax withholding and estimated tax payments situation.
What to do if you’ve already filed your tax return
The IRS stated they’re going to automatically start processing refunds for people with unemployment income that filed their returns before the law passed and did not claim the exclusion.
This is simple if the exclusion only lowered your taxable income and didn’t have any other impacts. In these cases, the IRS should correctly calculate the refund and send it to you starting in May. You do not have to file an amended tax return in this case.
Things get more complicated if the excluded income allows you to qualify for other tax breaks. These breaks, including credits and deductions, usually disqualify people that have income over a certain amount. The earned income tax credit is one such tax credit.
If the new exclusion lowers your income enough to qualify for new tax breaks you didn’t previously qualify for, the IRS won’t automatically apply those tax breaks. While you may get an automatic refund check for the tax you paid on the unemployment income, you have to file an amended return to claim the new tax breaks you now qualify for but didn’t qualify for before.
The good news is that people who already qualified for these tax breaks but now qualify for bigger versions of them don’t have to file an amended tax return. Because your return shows you already claimed the tax break, the IRS can make the necessary adjustments when they process your automatic refund.
Federal laws don’t change state tax laws
It’s important to note that Congress can only change federal income tax rules. While some states have changed their laws to comply with this federal income tax change, not all states have.
Check your state’s tax laws to see if you may qualify for this exclusion on your state income tax return, as well. If you do, you’ll need to check to see if your state will automatically refund you or if you need to file an amended tax return with your state to claim the exclusion.
Summary
Congress passed the American Rescue Plan Act of 2021 in March 2021 which allowed certain taxpayers to exclude up to $10,200 of unemployment income from their 2020 tax returns. If you already filed your tax return, the IRS may issue an automatic refund starting in May.
Certain taxpayers may still need to file an amended return, so make sure you fully understand how this could impact your tax return before brushing it off. If you don’t, you may be leaving money on the table.
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