Good news from the Internal Revenue Service. The IRS announced that it had begun issuing refunds to taxpayers who filed their 2020 tax returns and paid taxes on their unemployment benefits before there was a tax law change affecting unemployment taxation.
As you may recall, President Joe Biden signed the American rescue plan in March of this year. There were many items in that legislation, including a provision exempting up to $ 10,200 in unemployment benefits per person from federal taxes. As a result, a couple who both received unemployment benefits could get up to $ 20,400 in tax exemption. This provision is only for 2020, and the IRS estimates there are over 10 million Americans who filed their tax returns and reported their unemployment benefits as income before the law was changed.
If a change in tax law affected your tax return in the past, you usually had to file an amended return; this is not the case in this situation. If you have declared your unemployment income on your tax return and did not take advantage of the $ 10,200 exclusion, the IRS will automatically adjust your return and send you your refund. In other words, you don’t need to file an amended declaration, the IRS will do it for you automatically.
The IRS begins its process with individual taxpayers and will eventually reach taxpayers who have filed joint declarations. It is estimated that this process will last all summer. So if you are one of the taxpayers concerned, be patient.
Of course, as with everything else in our tax laws, there is a caveat. Even if the IRS does not require you to file an amended declaration, you may benefit from doing so in certain situations. You may find that the adjustment of your adjusted gross income makes you eligible for a federal tax credit that you would not previously have been eligible for due to the change in your income.
More:Rick Bloom: Do I have to keep paying for this life insurance?
More:Rick Bloom: Divorce for Older Couples on the Rise. The financial implications are huge.
If you didn’t apply for credit on your original return and are now eligible for that credit with the reduction in your income, the IRS requires you to file an altered return.
I know a lot of people get nervous about submitting altered declarations thinking that it will automatically lead to an audit or other types of IRS audits. Fortunately, that’s not the case. Filing an amended statement in and of itself does not result in an IRS review. So if you are one of the taxpayers concerned and crediting is only possible by filing an amended declaration, I advise filing the amended declaration.
As a side note, credits are far more valuable than prints. A credit is a dollar-for-dollar reduction in your taxes. So if you had a $ 1,000 loan, your taxes would be reduced by $ 1,000. On the flip side, if you had a $ 1,000 deduction and were in a 15 percent class, your tax savings would only be $ 150. Credits are valuable and you don’t want to leave them on the table.
One last note and that is, don’t forget your Michigan income tax return. The state of Michigan has already confirmed that $ 10,200 in unemployment benefits will be tax-free for 2020. However, unlike the IRS, you will need to file an amended statement to take advantage of the new deduction. My advice to keep things simpler is that you should file your Michigan Amended Return after receiving notice that federal agencies have changed your federal statement.
Good luck.
Rick Bloom is a paid financial advisor. His website is www.bloomadvisors.com. If you’d like Bloom to answer your questions, email [email protected].