Final corrections for taxpayers who overpaid their taxes on unemployment compensation received in 2020 have been completed by the IRS. Approximately 14 million returns were corrected, resulting in nearly 12 million refunds totaling $14.8 billion.
The American Rescue Plan Act of 2021, which became law in March 2021, allowed taxpayers to exclude up to $10,200 in 2020 unemployment compensation from taxable income calculations (up to $10,200 for each spouse if married filing jointly). The exclusion applied to individuals and married couples whose modified adjusted gross income was less than $150,000.
To ease the burden on taxpayers, the IRS reviewed Forms 1040 and 1040-SR that were filed prior to the law’s enactment to identify taxpayers who had already reported unemployment compensation as income and were eligible for the correction. The IRS determined the correct taxable amount of unemployment compensation and tax.
Overpayments Refunded or Applied to Tax Due
With an average refund of $1,232, some taxpayers received refunds, while others had the overpayment applied to taxes due or other debts. In some cases, the exclusion only resulted in a reduction in their adjusted gross income. Letters were mailed to these taxpayers to inform them of the corrections. Taxpayers should keep that letter with their tax records.
Many of the adjustments included corrections to the:
- Earned Income Tax Credit
- Recovery Rebate Credit
- Additional Child Tax Credit
- American Opportunity Tax Credit
- Premium Tax Credit
- Advance Premium Tax Credit
Of note is that a taxpayer who is eligible for the unemployment compensation exclusion but whose account was not corrected by the IRS may need to file an amended 2020 tax return. Taxpayers who filed 2020 Forms 1040 and 1040-SR can file Form 1040-X, Amended U.S. Individual Income Tax Return, to claim the exclusion and any applicable non-refundable or refundable credits impacted by the exclusion. Taxpayers should not file an amended return if they previously filed one claiming the exclusion.
Taxpayers that need to file an amended tax return can view their 2020 tax records in their Online Account or request that a 2020 tax account transcript be mailed to them. Please call the office for more information about this topic, including eligibility requirements.