Taxpayers who received unemployment benefits during 2020 could exclude the first $10,200 of benefits received from their taxable income as long as their total income reported on their tax returns was less than $150,000. This rule wasn’t enacted until March causing eligible taxpayers who filed their returns prior to mid-March 2021 to miss out on this tax break. More info on this opportunity is available at: New Exclusion of up to $10,200 of Unemployment Compensation | Internal Revenue Service (irs.gov)
If you paid federal taxes on up to $10.2k of 2020 unemployment benefits that should have been tax-free, please hold off amending your tax return at this time. Instead, as stated on the IRS website:
“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 first refunds are expected to be made in May and will continue into the summer.
For those taxpayers who already have filed and figured their tax based on the full amount of unemployment compensation, the IRS will determine the correct taxable amount of unemployment compensation and tax. Any resulting overpayment of tax will be either refunded or applied to other outstanding taxes owed.
For those who have already filed, the IRS will do these recalculations in two phases, starting with those taxpayers eligible for the up to $10,200 exclusion. The IRS will then adjust returns for those married filing jointly taxpayers who are eligible for the up to $20,400 exclusion and others with more complex returns.”
Therefore, no federal amended tax return is necessary. However, if your reduction in taxable unemployment benefits impacts other tax credits, you will need to amend your federal tax return. Please contact your tax preparer if you received an automatic federal refund for the unemployment exclusion to confirm whether there is any additional impact on your federal taxes. Additionally, your tax preparer can follow up with your specific state’s rules to determine if amending your state income tax return may be necessary.
With regard to this refund, if a taxpayer’s bank information is included on the 2020 federal tax return, then the refund will be paid via direct deposit. Otherwise, a check will be mailed to the taxpayer’s address per the tax return filed for 2020. Additionally, taxpayers will receive a notice from the IRS explaining the adjustments.