A new change to a tax law will give taxpayers who received unemployment benefits in 2020 a bit of a tax break. In most years, unemployment compensation is subject to federal taxes. Because unemployment benefits are considered income, taxpayers have to pay taxes on them. Under the new law, some unemployment benefits recipients will not have to pay taxes on some of their 2020 compensation.
Under the new law which was part of the recently passed American Rescue Plan, recipients who earned less than $150,000 in modified adjusted gross income can exclude a portion of their unemployment compensation from their income. For couples who file married filing jointly, they can exclude up to $20,400 which would be up to $10,200 for each spouse who received unemployment. All other eligible taxpayers can exclude up to $10,200 from their income.
The IRS will automatically refund money to eligible taxpayers who have already filed their 2020 federal tax returns. The refunds are expected to begin this month and will continue into the summer. The law change occurred after some people had already filed their tax returns, which is why the IRS will determine the correct amount of taxable unemployment compensation. If you ended up overpaying your taxes, you will either be refunded the overpayment amount or that amount will be applied to other taxes owed.
You only need to file an amended return if the recalculations make you newly eligible for additional federal tax credits or deductions not already included in your filed tax return, such as the Earned Income Tax Credit.