However, with federal enhanced unemployment benefits soon running out, you may soon have some unanticipated money heading directly to your bank account or mailbox.
No, not a fourth stimulus check, but a tax refund on 2020 unemployment benefits.
If you’re heard about this but want to know more details, here’s a breakdown on everything.
What Are The Unemployment Refunds?
In a nutshell, if you received unemployment benefits in 2020 and paid taxes on that money, you’ll be getting some or all of those taxes back via direct deposit or the mail.
The American Rescue Plan Act of 2021 was passed by Congress and signed into law by President Joe Biden on March 11. One of the provisions in the plan was that taxes on up to $10,200 in unemployment benefits would be waived for people earning less than $150,000 a year.
The IRS has already sent out 8.7 mllion refunds totaling over $10 billion, but another 1.5 million taxpayers will be receiving refunds in August. More taxpayers will receive money throughout the year.
How much you will receive depends on how much you paid in taxes on your unemployment income in 2020. According to the IRS, the average refund is $1,686.
Should I Report the Unemployment Income Refund On My Taxes Next Year?
“No,” says Mark Steber, chief tax information officer for Jackson Hewitt.”This is a tax refund, and federal refunds aren’t reported as income on the next year’s federal tax return. You may, though, want to discuss with a tax professional whether your refund will affect your state tax return.”
Steber says Jackson Hewitt has had clients who thought they would receive $10,200 back from IRS, which isn’t the case.
“People didn’t realize the nontaxable amount was a reduction in taxable income, which generally results in a refund,” Steber says. “People’s misunderstanding of this tax issue also created confusion with state tax returns. Each state handles taxes in their own way, making state income taxes a confusing mess for most taxpayers.”
Will Unemployment Benefits Be Taxable This Year?
“Yes,” Steber says. “At this time, unemployment compensation is fully taxable on the 2021 tax return.”
In other words, that could change, but don’t count on it. Steber has some other advice for unemployed workers who are concerned about how it’ll affect their taxes.
“If taxpayers collect unemployment into 2021, we recommend they do a midyear tax checkup now so they can be sure to understand their tax situation fully before the end of the year or come time to file 2021 taxes,” Steber says. “Taxpayers also shouldn’t forget: You can have 10% of unemployment withheld for income taxes, which is a great help when filing taxes next year.”
If I Haven’t Received an IRS Payment, Will I Get One in August?
Not necessarily. It really depends on how complicated your tax return is.
“The IRS broke the refund releases down and started off with the easy tax returns in May, then adding an additional million or so returns in June and again in August,” Steber says. “The later releases are for more complex tax return situations. The IRS expects to be done with all the unemployment refunds before December this year.”
How Can I Find Out if the IRS Will Send Me An Unemployment Refund?
You may have luck going to the IRS website and using its Where’s My Refund? tool. Also check out the IRS Get Refund Status page, suggests Salvador Gonzalez, a tax expert and an accounting professor at Walden University.
“As the IRS has been experiencing a large volume of calls for stimulus payments and similar queries, taxpayers may want to use the online IRS form before trying to call them directly,” Gonzalez says. “But if you do decide to call, don’t give up easily. Persistence is the best way to obtain information and to get advice on possible next steps.”
If I’m Due An Unemployment Refund, Why Haven’t I Received It?
Aside from having a complex tax form, it may be that you need to file an amended tax return.
“While the majority of people who are owed a refund for the $10,200 unemployment compensation adjustment will have their return automatically adjusted for the adjustment, the IRS has specifically stated that certain groups should amend their returns for the adjustment,” says Logan Allec, a Los Angeles-based certified public accountant and founder of the personal finance website Money Done Right.
There are a few instances in which taxpayers should file an amended return, according to the IRS website:
- If you “did not submit a Schedule 8812 with the original return to claim the additional child tax credit and are now eligible for the credit after the unemployment compensation exclusion.”
- If you “did not submit a Schedule EIC with the original return to claim the earned income tax credit (with qualifying dependents) and are now eligible for the credit after the unemployment compensation exclusion.”
- If you think you are eligible for any other credits or deductions. “Make sure to include any required forms or schedules,” according to the IRS website.
Still, most people, if they’re owed a refund, probably aren’t going to have to do a thing and will automatically receive their funds, so there’s no need to stress quite yet.
Source: U.S. News & World Report