For folks still waiting on the Internal Revenue Service to deliver their special tax refunds for the unemployment compensation tax exclusion for 2020, don’t count on the money for the holidays. The IRS updated its IRS Operations During Covid-19 web page, as of December 20, with a new section showing the status of unemployment compensation exclusion corrections. It says it plans to issue another batch of these special refunds before the end of the year. But it notes, that as it continues to review more complex returns, the process will continue into 2022.
The update says that “to date” the IRS has issued more than 11.7 million of these special refunds totaling $14.4 billion. That’s the same data the IRS released on November 1 when it announced that it had recently sent approximately 430,000 refunds totaling more than $510 million. In that batch of corrections, the average special refund was $1,189. The IRS says it has identified more than 16 million taxpayers who may be eligible for the special refunds. Some taxpayers will get refunds, while for others, the IRS will apply the overpayment to taxes due or other debts.
Why is the IRS issuing these special refunds? In the March 11th Covid-relief American Rescue Plan, Congress made up to $10,200 of 2020 unemployment benefits nontaxable for individuals and married couples whose modified adjusted gross income was less than $150,000. Generally, unemployment benefits are taxable, including basic state benefits as well as the extra $600 weekly CARES Act federal pandemic benefits.
The problem: A lot of taxpayers already had filed their 2020 tax return before Congress put in the retroactive tax break. The solution: Instead of requiring amended returns, the IRS decided to make automatic corrections based on the new $10,200 exclusion, sending out special refunds. Sounds easy, but when you make one change to a tax return, there’s a cascading effect, and you want to make sure the fix is done right.
If you’re due a special unemployment tax refund, look out for an IRS letter that will include details of how they adjusted your return. The letter should arrive within 30 days from when the corrections were completed. It will include the refund amount, and any overpayment applied to outstanding taxes or other federal or state debts owed if applicable.
Most taxpayers who got unemployment benefits last year don’t need to file an amended return to get the special Cares Act unemployment compensation tax break. But in some cases, you should. The latest updates to the IRS Frequently Asked Questions around the 2020 unemployment compensation exclusion on November 12 cover amended returns.
Topic D, Q2: What if I know I’ll be entitled to a credit or deduction that wasn’t claimed on my tax return? Should I file an amended return? A2: “It depends.” The exception is for the additional child tax credit or the earned income tax credit. Click on the IRS Topic D link for the long answer.
Topic G, Q8 and Q9 Why did I receive an IRS CP08 or CP09 notice? A: You may be eligible for the additional child tax credit or the earned income credit. You are not required to file an amended return; you should reply to the IRS letter/notice.
Topic I, Q3: What if you’ve got kids in college and are filling out the FAFSA? A: If you received a CP21 Notice, you should provide it to the school’s financial aid office. If there were any changes made to the American Opportunity Tax Credit, the changes would be reflected in that Notice.