Tax experts often advise taxpayers to file their taxes early to expedite their refund or to be in a better position to pay their tax bill by April 15. But the strategy may have backfired this year, as early filers who paid taxes on their federal unemployment benefits missed out on an important tax break. Under the American Rescue Plan signed into law Thursday, the IRS will make the first $10,200 in unemployment benefits from 2020 tax-free. Typically, unemployment is considered taxable income at your regular tax rate, which depends on your tax bracket based on income.
MarketWatch reports that 55.7 million tax returns have already been filed as of March 5, which means many Americans will need to file amended returns that could result in larger refunds or smaller tax bills.
Filing an amended return is not a difficult process, but tax experts have advised people to wait a bit longer to file the amended return in case the IRS finds a way to make the adjustments automatically. Robert Kerr, a Washington, D.C.-based IRS enrolled agent and tax consultant said waiting can give the IRS time to figure out how to handle these returns, MarketWatch reported. He said it also allows tax software companies to update their systems based on the tax law change. “It’s in everyone’s interest to get this sorted quickly,” he told MarketWatch.
When the time comes to file an amended return, taxpayers can do so online using IRS Form 1040-X. The IRS has made it possible this year to file the amended return electronically as well as by mail.
You’ll need to complete columns A, B and C for the lines that relate to the changes you’re making.
Enter the original amount you reported in column A, the change in column B and the corrected amount in column C. Those amending their income to remove unemployment payments, for instance, would focus on lines 1 through 23. Make sure to consult with a tax professional before filing the amended return if you have any questions or are unclear about the process.
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