Unemployment $10,200 tax break: Single taxpayers who lost work in 2020 could see extra refund money soonest

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Susan Tompor, Detroit Free Press
Published 6:32 p.m. ET May 14, 2021

Because of the coronavirus pandemic, 2020 may be a tax year like no other. Here are answers to some of your top questions.

USA TODAY

More than 10 million people who lost work in 2020 and filed their tax returns early this year are going to get a special review of their tax returns, which could generate extra refund cash. 

The Internal Revenue Service said Friday that it will begin issuing tax refunds this week to eligible taxpayers who filed their 2020 tax returns in February and early March and paid income taxes on all their unemployment benefits.

A portion of jobless benefits was excluded from taxable income under the American Rescue Plan, which was signed into law on March 11.

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The change took place roughly a month after the IRS began accepting tax returns Feb. 12 and before many early filers would have been able to take advantage of the new generous tax break. 

After a review, some people could see a tax refund, a reduced balance for taxes due or no change to their tax situation, according to the IRS. 

Monday is the filing deadline for federal tax returns in most states.

Taxpayers who have not yet filed a tax return should pay attention to the new rules relating to jobless benefits and, the IRS says, “follow the guidance for Forms 1040 and 1040-SR, which details how to exclude unemployment compensation.”

The IRS will make corrections automatically for those early filers.

ID thieves are filing fake unemployment claims, taking advantage of the economic unrest during the COVID-19 crisis. In this March 17, 2020, file photo, people wait in line for help with unemployment benefits at the One-Stop Career Center in Las Vegas. T (AP Photo/John Locher, File) (Photo: John Locher, AP)

The IRS will first tackle simple tax returns for single individuals. That group would include tax returns that do not claim children as dependents or do not claim any refundable tax credits.

The next phase will include more complex tax returns involving married couples filing jointly. The IRS anticipates it will take through the end of summer to review and correct these returns. 

“The IRS will continue to send refunds until all identified tax returns have been reviewed and adjusted,” according to a release issued Friday. 

Taxpayers who provided bank account information on their 2020 tax returns will receive their money via direct deposit. Otherwise, a paper check would be mailed to the address on record. 

The IRS has asked that people in these groups not file amended tax returns unless they would suddenly be eligible for certain income-based tax credits not claimed on their original return, such as the EITC for their qualifying children. 

Some corrections to the Earned Income Tax Credit without qualifying children and the Recovery Rebate Credit are being made automatically as part of this process. 

The waiver for jobless benefits applies to households earning up to $150,000. If your modified AGI is $150,000 or more, you can’t exclude any unemployment compensation.

The income cap is the same for singles and married couples filing joint returns.

Only up to the first $10,200 of unemployment compensation is not taxable for an individual. And this tax break only applies to 2020. 

If both spouses lost work in 2020, a married couple filing a joint return might not have to pay federal income taxes on up to $20,400 in jobless benefits. But much depends on how much each person received in benefits. 

If, for example, one spouse received $15,000 in jobless benefits in 2020 that spouse would qualify for a $10,200 waiver. If the other spouse received just $1,000 in unemployment compensation in 2020, then the exclusion for tax purposes that the couple would receive would be $11,200 — not $16,000.

The IRS notes that it’s important to understand that the $10,200 limit is the amount of money that can be excluded from taxable income. It is “not the amount of the refund. Refund amounts will vary and not all adjustments will result in a refund,” the IRS stated Friday.

Some people won’t see any extra cash because the refunds can be used to offset some unpaid debts, including past-due federal tax, state income tax, child support, spousal support, federal student loans and money owed relating to state unemployment compensation debt. 

“The IRS will send a separate notice to the taxpayer if the refund is offset to pay unpaid debts,” the IRS said. 

Expect to receive a notice explaining any of these corrections within 30 days of when such a change is made. Keep these notices for records. 

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