Refund Checks for the Unemployment Tax Break Are on the Way

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Taxpayers who received unemployment benefits in 2020 and were on the earlier side of filing 2020 tax returns are about to receive their refund. The IRS has started issuing automatic tax refunds to taxpayers who reported unemployment payments before the American Rescue Plan was signed into law in March, waiving federal income tax on a portion of unemployment benefits.

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Under the American Rescue Plan stimulus relief bill, which went into effect on March 11, unemployment benefits up to $10,200 are exempt from federal income tax for taxpayers reporting an adjusted gross income of less than $150,000. The exemption increases to $20,400 for married couples filing jointly. It only applies to 2020 unemployment benefits.

Those who overpaid because they filed their tax returns before the exemption went into effect will not need to do anything further — the IRS will recalculate those returns on taxpayers’ behalf in two phases, beginning with those who are eligible for the $10,200 exclusion. The IRS will then adjust returns for married joint filers and others with more complex returns. Refunds should be hitting mail boxes and bank accounts — however you normally receive tax refunds — within the next couple of weeks.

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Important to note: The exemption does not apply to state taxes. Although many states have waived taxes on unemployment benefits, or do so generally, not every state has the same policy, so it is possible that you owe state income tax on all of your unemployment benefits even if you qualify for the federal exemption.

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About the Author

Georgina Tzanetos is a former financial advisor who studied post-industrial capitalist structures at New York University. She has eight years of experience with concentrations in asset management, portfolio management, private client banking, and investment research. Georgina has written for Investopedia and WallStreetMojo. 
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