In a News Release, IRS has announced that taxpayers who already filed their 2020 individual tax return without taking advantage of the 2020 unemployment benefit exclusion, do not need to file an amended return to take advantage of the exclusion. But, IRS points out that, in some cases, it will be beneficial for taxpayers who didn’t take advantage of the exclusion to file an amended 2020 return.
Background—ARPA’s unemployment exclusion provisions.
The American Rescue Plan Act of 2021 (ARPA), which wasn’t signed into law until March 11, provides that, for taxpayers whose 2020 modified adjusted gross income is less than $150,000, the first $10,200 of unemployment compensation received in 2020 is not included in the taxpayer’s 2020 gross income. In the case of a joint return, the first $10,200 per spouse is not included in gross income. (Code Sec. 85(c)(1), as amended by ARPA Sec. 9042(a))
No need to file amended return.
For those taxpayers who already have filed and figured their 2020 tax based on the full amount of unemployment compensation received in 2020, IRS will determine the correct taxable amount of unemployment compensation and tax. Any resulting overpayment of tax will be either refunded or applied to other outstanding taxes owed.
For those who have already filed, IRS will do these recalculations in two phases, starting with those taxpayers eligible for the up to $10,200 exclusion. IRS will then adjust returns for those married filing jointly taxpayers who are eligible for the up to $20,400 exclusion and others with more complex returns.
IRS will take steps in the spring and summer to make the appropriate change to the returns, which may result in a refund. The first refunds are expected to be made in May and will continue into the summer.
But some taxpayers may still want to file amended return.
IRS says that there is no need for taxpayers to file an amended return unless the calculations make the taxpayer newly eligible for additional federal credits and deductions not already included on the original tax return.
For example, IRS can adjust returns for those taxpayers who claimed the Earned Income Tax Credit (EITC) and, because the exclusion changed the income level, may now be eligible for an increase in the EITC amount which may result in a larger refund. However, taxpayers would have to file an amended return if they did not originally claim the EITC or other credits but now are eligible because the exclusion changed their income.
IRS also suggests that taxpayers who did not take advantage of the exclusion when they filed their 2020 federal return, may want to review their state tax returns as well.
Although the News Release is silent on the subject, it would appear to be a good idea to file any amended returns soon, i.e., before IRS does its recalculations, in order to avoid the confusion that is likely if there is both an amended return and IRS’s recalculations with respect to the same taxpayer.
Another reason to file as soon as possible is if you are married filing a joint return and are eligible for the up to $20,400 exclusion or if you have a complex return. This way you do not need to wait till the summer to get your refund.
To continue your research on tax treatment of unemployment compensation, see FTC 2d/FIN ¶ H-3007.
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