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IRS to send 4 million additional tax refunds for unemployment

The Internal Revenue Service will issue 4 million tax refunds this week to filers who paid too much in taxes for their 2020 unemployment benefits.

The refunds by direct deposit will start on July 14, while those by paper check will begin July 16.

"To ease the burden on taxpayers, the IRS has been reviewing the Forms 1040 and 1040SR that were filed prior to the law’s enactment to identify those people who are due an adjustment," the agency said in a statement on Tuesday. "For taxpayers who overpaid, the IRS will either refund the overpayment, apply it to other outstanding taxes or other federal or state debts owed."

Read more: Top 10 tax mistakes — and how to avoid them

Under the $1.9 trillion American Rescue Plan, the first $10,200 in unemployment benefits aren't taxed for eligible filers. Because the legislation was signed into law halfway through the tax season, some taxpayers had already filed their federal returns without taking advantage of the new tax break.

The agency identified 13 million taxpayers who may be eligible for an adjustment as of June. For this round of refunds, the agency reviewed 4.6 million returns and approximately 4 million were eligible for an average refund of $1,265. The agency issued another 2.8 million refunds in June.

US Treasury Check. Used for tax refunds and also the Covid-19/corona virus stimulus payments in 2020
Photo: Getty Creative (LPETTET via Getty Images)

The review and the processing of the additional refunds will continue throughout the summer.

Filers whose tax returns have been processed will receive two tax refunds: the first reflects how they filed and the second refund will reflect any tax break they get on their unemployment benefits. The IRS will issue refunds by direct deposit for taxpayers with valid banking information on their 2020 return. If that information is not available, a paper check will be sent instead.

The refunds will be subject to normal offset rules, including past-due federal tax, state income tax, state unemployment compensation debts, among others. If the refund is used to pay unpaid debt, the IRS will send a separate notice.

Both regular unemployment benefits and the jobless benefits provided by the stimulus legislation are subject to income tax. But the newly added tax exemption is for the first $10,200 of unemployment benefits; any benefits above that threshold are taxable. The break applies to the 2020 tax year and for households making up to $150,000.

Taxpayers who become eligible for the Earned Income Tax Credit (EITC) after the unemployment benefits exclusion is calculated may have to file an amended return to claim new benefits, the IRS said.

Yahoo Money sister site Cashay has a weekly newsletter.
Yahoo Money sister site Cashay has a weekly newsletter.

Denitsa is a writer for Yahoo Finance and Cashay, a new personal finance website. Follow her on Twitter @denitsa_tsekova

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