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Unemployment $10,200 tax break: Some may need to amend returns for tax refunds

Jessica Menton, USA TODAY
·5 min read

Some Americans who received a federal tax break on their unemployment insurance last year may have to file an amended return to get their full refund.

Taxpayers won’t have to file an amended federal return unless the unemployment tax break now makes them eligible for tax benefits like the Earned Income Tax Credit, a refundable tax credit for low- to moderate-income working individuals and couples, particularly those with children.

This applies to taxpayers who filed their federal and state tax returns before the American Rescue Plan became law in March. The latest $1.9 trillion stimulus package created a new tax break for tens of millions of workers who received unemployment benefits last year after businesses were forced to close and lay them off during the coronavirus pandemic.

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Until now, jobless insurance had to be reported as taxable income and many would likely owe federal income taxes on those benefits.

The legislation allows taxpayers who earned less than $150,000 in adjusted gross income to exclude unemployment compensation up to $20,400 if married filing jointly or $10,200 for all other eligible taxpayers. The legislation excludes only 2020 unemployment benefits from taxes.

Here's what you need to know:

Why must some amend their returns?

Beginning in May and continuing into the summer, the IRS will automatically refund taxpayers who filed their returns without claiming the new tax break on unemployment benefits, it said, but this was in regards to their federal return.

Some states may still opt to tax jobless aid, tax experts say. That means some taxpayers may have to file an amended return to get their maximum refund if the unemployment tax break now makes them eligible for additional tax credits that were not claimed on their original return, or if they mistakenly excluded their unemployment income in states that choose to still tax the jobless aid.

Otherwise, the IRS said it will recalculate returns of taxpayers by incorporating the $10,200 exclusion and either refund them or apply it to other taxes they owe.

“While many states will follow suit and automatically refund taxpayers, there are a handful of states that are requiring taxpayers to file an amended tax return to receive the benefit of the unemployment tax break if they filed before the American Rescue Plan was signed,” says Curtis Campbell, president of TaxAct, a tax preparation software.

This varies by state. Taxpayers who filed their returns before the American Rescue Plan became law in March may need to file an amended state tax return to get a state refund.

New Mexico, for instance, has advised taxpayers to amend their returns if they were filed before mid-March.

Which states aren’t offering the tax break?

Eleven states aren’t offering the unemployment tax break, according to tax preparation service H&R Block. They are: Colorado, Georgia, Hawaii, Idaho, Kentucky, Minnesota, Mississippi, North Carolina, New York, Rhode Island and South Carolina.

Three states, including Indiana, Massachusetts and Wisconsin, offer a partial tax break on unemployment benefits.

Taxpayers who filed a tax return in these states after the legislation passed may have excluded jobless benefits from their state and federal returns. Those taxpayers may need to add back their unemployment compensation to their income on their state returns.

But few taxpayers would need to do that because tax software providers in most cases wouldn’t have allowed an exclusion at the state level until the state issued guidance, according to Andy Phillips, Director of the Tax Institute at H&R Block.

But for those people who filed their returns by paper in a state where no exclusion is available and excluded their unemployment income, they would need to amend their return and add back any income, he added.

Some may qualify for tax credits now

The IRS has stressed that taxpayers shouldn’t file an amended return unless the calculations make the taxpayer newly eligible for additional federal credits and deductions not already included on the original tax return.

The IRS, for instance, can adjust returns for taxpayers who claimed the EITC. Because the exclusion changed the income level, those people may now be eligible for an increase in the EITC amount which may result in a larger refund.

Taxpayers, however, would have to file an amended return if they didn't originally claim the EITC or other credits but now are eligible because the exclusion changed their income. These taxpayers should review their state returns as well, tax experts say.

Others may qualify for the American Opportunity Tax Credit, which is a credit for qualified education expenses paid for an eligible student for the first four years of higher education.

Should I amend my return?

For now, taxpayers should wait until further guidance is provided from the IRS before they amend their federal and state returns so that they don’t inadvertently delay the agency’s process, tax experts advise.

Taxpayers also need to make sure that the IRS or their state won’t amend their returns for them first.

“If you amend your state return, you may be in a situation where you should have amended your federal return as well,” says Phillips. “Don’t just do one without the other. It’s really about working with a tax expert or a software provider that can help you understand it so that you don’t create more problems for yourself.”

This article originally appeared on USA TODAY: Unemployment $10,200 tax break: Some states require amended returns