The Internal Revenue Service announced today that it has started sending out special tax refunds due to an estimated 13 million taxpayers who paid taxes on unemployment benefits when they filed their 2020 tax returns this spring. This week more than 2.8 million of these refunds will go out, and the rest will follow in weeks to come.
There’s more cash coming to many more taxpayers: There are also premium tax credit refunds, supplemental stimulus payments, and advance child tax credit payments on their way. Watch your bank account or mail carefully. And keep records of the payments—for next year’s tax return.
Why the special unemployment benefits tax refunds? In the American Rescue Plan, the March 2021 Covid-19 relief package, Congress made up to $10,200 of 2020 unemployment benefits nontaxable. That’s the same law that authorized $1,400 Round 3 stimulus payments. Generally, unemployment benefits are taxable, including basic state benefits as well as the extra $600 weekly CARES Act federal pandemic benefits. If you got unemployment benefits in 2020, you should have received a Form 1099-G showing the amount you were paid and any federal income taxes withheld. You don’t have to ask for a revised form. Instead, the IRS is making automatic corrections based on the new $10,200 exclusion.
To date, the IRS has reviewed over 3.1 million returns showing unemployment benefits, with more than 2.8 million receiving refunds. Note: The $10,200 is the amount of income exclusion, not the amount of the refund. Refund amounts will vary. For some taxpayers, there will be no change, meaning no special refund. For others, the overpayment will be applied to taxes due or other debts.
One change to your tax return can mean a cascading affect of other changes. The IRS also is making corrections for the Earned Income Tax Credit, Premium Tax Credit and Recovery Rebate Credit affected by the exclusion on unemployment benefits. Watch out: Taxpayers who have qualifying children and who become eligible for the Earned Income Tax Credit after the exclusion is calculated may have to file an amended return to claim any new benefits. The IRS can adjust tax returns for those who are single with no children and who become eligible for the EITC. The IRS also can adjust tax returns where the EITC was claimed and qualifying children identified.
The next set of these special refunds should come out in mid-June, and the process will continue over the summer, as the IRS reviews more complex returns for potential refunds. Expect a letter from the IRS within 30 days of the adjustment, with details on the adjustment—whether it’s a refund, a payment of IRS debt or offset for other debts.
The American Rescue Plan also suspended the requirement to repay excess advance payments of the Premium Tax Credit used to lower your monthly health insurance premiums. If you paid an excess APTC repayment amount when you filed your 2020 tax return, the IRS will also refund this amount automatically.
Meanwhile the IRS is still sending out “plus-up” stimulus payments for taxpayers who earlier this year received payments based on their 2019 tax return but are eligible for a new or larger payment. In the two weeks ending May 26, the IRS sent out more than 900,000 of these “plus-up” payments, with a value of more than $1.6 billion In all, the IRS has made nearly 7 million of these supplemental payments this year.
And in July the IRS will start sending out the first monthly payments of the expanded Child Tax Credit to roughly 39 million households, covering 88% of children in the U.S. The American Rescue Plan increased the maximum Child Tax Credit in 2021 to $3,600 for children under the age of 6 and to $3,000 per child for children between ages 6 and 17. Eligible families will receive a payment of up to $300 per month for each child under age 6 and up to $250 per month for each child age 6 and above. Note: These payments are essentially an advance of the credit that you would otherwise take on your 2021 tax return that’s due in 2022.
Still waiting for your 2020 tax refund? Check out the IRS Where’s My Refund tool. There were 18.2 million individual tax returns in the processing pipeline as of May 22, according to the IRS Operations May 28 update. Good news: The backlog of prior year returns is down to 100,000 (on May 14th it was 600,000). Average refunds were running at $2,827, according to IRS filing statistics as of May 21.
If you still haven’t filed your 2020 return—the due date for most taxpayers was May 17, but the deadline was delayed for folks in Oklahoma, Louisiana, Texas, Kentucky, Alabama and Tennessee because of natural disasters—check out these 17 tax tips for filing your 2020 tax return.