Updated for $15 billion in IRS Refund Adjustments Payments Made in 2023
The IRS announced they have finally completed final corrections for 2020 tax filings for taxpayers who inadvertently overpaid their taxes on unemployment compensation they received in 2020.
The additional pandemic unemployment insurance income increased taxpayers taxable income (AGI on Form 1040), which essentially resulted in higher taxes. However in 2020, due to laws passed, the unemployment income should not have been counted as taxable income.
Nearly $15 billion in refunds are being mailed to taxpayers, many who who been waiting several years for the IRS to correct this mistake (as mandated in the ARPA act)
According to the IRS, the average tax refund being paid is $1,232. Approximately 14 million returns were automatically corrected by the IRS, and over 12 million refunds payments were made.
How and When will I get the 2023 unemployment insurance taxes refund?
No action is needed from taxpayers. The IRS will automatically process adjustments on Forms 1040 and 1040-SR, and notices explaining the adjustments have been sent to impacted taxpayers with 2020 tax filings.
The IRS will determine the correct taxable amount of unemployment compensation and tax and while most tax payers will receive the full refund amount, others had the refund applied to existing IRS taxes due or other debts. Payments will be made via check or direct deposit, based on your latest tax filings.
EITC, CTC adjustments
This adjustment to account for the exclusion of unemployment income essentially meant taxpayers saw a reduction in their adjusted gross income.
This could have also increased their eligibility for other tax credits like the EITC and CTC, which the IRS has accounted for in the automatic adjustments and included in the latest round of refund checks.
If a taxpayer is eligible for the unemployment compensation exclusion and their account was not corrected by the IRS, they may need to file an amended 2020 tax return to claim the exclusion and any applicable non-refundable or refundable credits impacted by the exclusion.
Under the Biden Stimulus (ARP) package which funded another round of unemployment benefit extensions, there was a late provision added that provided a tax break on unemployment insurance (UI) benefits. This tax break exempted the first $10,200 in unemployment benefits/compensation received in 2020 (not in 2021). For married couples, this amount would be $20,400.
This exemption went a long way to prevent the surprise unemployment income tax hits many jobless American households have seen or are potentially facing in when filing their tax return.
Note however that the approved unemployment income tax exclusion is only for income earned in 2020. At this stage there are no plans in Congressional bills for a unemployment income tax break in later years.
IRS Payment Status and Schedule of Adjusted Unemployment Tax Refund
The IRS has started issuing additional refund adjustments related to the $10,200 unemployment tax break, with over 7 million refund payments sent to tax payers who earlier paid federal taxes on unemployment compensation received in 2020. The latest round of refund payments will start from mid-July, in addition to the previous rounds in May and June.
Adjusted refund processing and refunds related to this tax break and stimulus checks will continue over the next few months as the IRS “catches-up” on payments to eligible tax payers, which will include more complex cases/filing status’.
For the latest round of refund payments, The IRS sent approximately 430,000 refunds totaling more than $510 million to taxpayers who paid taxes on unemployment compensation excluded from income for tax year 2020.
So far, the IRS has identified over 16 million taxpayers who may be eligible for the adjustment. The IRS has also announced that tax payers will receive refunds, which will be issued periodically, and some will have the overpayment applied to taxes due or other debts. For some there will be no change.
This additional refund, where applicable, will mainly apply to workers who’d filed a tax return before or around March 11th, when the ARPA bill that contained this provision became law. Those who filed after and were able to claim this tax break should have already received this a regular tax refund (if eligible).
Taxpayers will be notified about their potential adjustment via mail, generally within 30 days of the adjustment. This will include additional information on the amount of the tax refund adjustment and any offsets for other authorized debts.
$10,200 Unemployment Tax Break Qualification Criteria
This unemployment income tax break however will only apply to households with total incomes under $150,000 (Adjusted Gross Income, AGI) in 2020. For married couples, the $150,000 limit still applies as it is a household maximum and not a straight filing status doubling like many other income level based credits.
Also per recent IRS guidance, this is a hard limit and if your household income is $150,000 or more, irrespective of filing status, you can’t take this tax break on any unemployment income earned in 2020.
Note that this tax break only applies for your 2020 income – used for your tax returns filed in 2021. At this stage no provisions in place for it to apply on your 2021 income (for 2022 filings). But it is highly likely Congress will extend this tax break given elevated levels of pandemic induced unemployment.
On average this tax break could reduce a tax filers liability or increase the refund received by up to $1,020 (or $2,040 for couples). Those who had more than $10,200 in unemployment income in 2020, and there are many states where jobless workers would have received more than this, will still be on the hook for unemployment related taxes above this level.
How the tax break would work and how much would I get back?
John had $21,000 in unemployment benefits in 2020 via the PEUC and FPUC programs. He earned another $30,100 from his job before he was laid off. In this scenario, John’s total 2020 income would be below the $150,000 limit to get the tax break so the first $10,200 of unemployment income would be exempt from taxation. His taxable income (AGI) would essentially be $51,200 – $10,200 = $41,000.
Based on this he would likely be able to take other low income tax credits and the standard deduction ($12,400 in 2020) which may mean John gets a pretty decent refund to boot if he paid withholding taxes on his earned income.
Calculating how much you will get back specifically will vary on your tax situation and you can start a free efile return to get an estimate. But for on average the refund related directly to this tax break is between $1,000 and $1,500.
What if I already filed my taxes and paid taxes on Unemployment?
The IRS have now issued guidance around this. Basically they are saying that for folks who have filed their 2020 return they do not need to file an amended return (as was originally assumed).
The IRS will automatically make the adjustment once they update their systems to review eligibility and process this tax break. (see top section for the latest on these automatic adjustments)
If you are eligible you will get an additional refund via direct deposit or in the mail.
What about my 1099-G unemployment tax form?
The IRS receives form 1099-G (reporting unemployment benefit payments) electronically from the individual states’ unemployment agencies. If a tax return or amended tax return is filed reflecting a different amount from form 1099 G, the IRS matching engine will generate a letter to the tax holder showing the discrepancies along with an tax bill for monies due.
The IRS guidance has confirmed that this unemployment tax exclusion should be reported separately from your unemployment compensation.
Does the $10,200 lower your taxable income (AGI)? Tax Credit or Tax Deduction?
Yes. The tax break would act like a credit and reduce your overall taxable income. See example above. It would lower your 2020 tax liability or result in a refund if you can claim the standard deduction and other refundable credits (like the expanded CTC an EITC). See the above point on what to do if you have already filed your tax return.
Should I wait to file my taxes if I can claim this credit?
No. You can claim this now if you have not filed your return. Larger tax preparation companies (like Turbo Tax) have implemented the programming to claim this credit. If you have already filed your return the IRS will review details and make an adjustment to pay back any tax credits per the above update. Adjustment refund payments are expected to start in late May, over several batches through summer.
What If I My State Does Not Tax Unemployment?
This tax break or exclusion is for your federal (IRS) taxes. There are many states that do not tax unemployment benefits or only partially tax them. But this $10,200 tax break would not be impacted by that because it is only applicable against your federal taxes that you file via the IRS.
How does the Tax Break work for Married Couples?
For married couples filing jointly with AGI below $150k where BOTH received unemployment income, each can deduct the $10,200 for a total of $20,400 against their 2020 taxes. If you file Form 1040-NR (for non-residents, trusts and deceased individuals), you can’t exclude any unemployment compensation for your spouse.
Will the Unemployment Tax Break Cover 2021 Income and Claimable in 2022?
Despite millions of Americans facing months of unemployment in 2021 (after a rough 2020), it is unlikely Congress will provide another unemployment income tax break for this year. The cost of this tax break would be hard to absorb in another bill and with an improving economy, the argument for more financial support may be a hard sell politically.
The other reason is that several other tax breaks, like the expanded CTC and third stimulus checks, helped unemployed families indirectly as well. Coupled with (likely) lower taxable income in 2021, it is likely that many unemployed will be at or below the lowest taxable income bracket in any case – so a 2021 jobless may be of limited value.
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