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IRS IS SENDING UNEMPLOYMENT TAX REFUND CHECKS

Uncle Sam is issuing 2.8 million refunds to people eligible for the new $10,200 unemployment compensation tax exemption. More payments to follow.

If you received unemployment benefits last year and filed your 2020 tax return relatively early, you may find a check in your mailbox soon (or a deposit in your bank account). The IRS started issuing automatic tax refunds last month to Americans who filed their 2020 return and reported unemployment compensation before tax law changes were made by the American Rescue Plan. As of June 4, the tax agency has sent more than 2.8 million refunds, and it announced that 2.8 million more payments will go out. After that, the next round of refunds will be sent in mid-June, with additional refund checks to be sent through the summer.

The American Rescue Plan Act, which was enacted in March, exempts up to $10,200 of unemployment benefits received in 2020 ($20,400 for married couples filing jointly) from federal income tax for households reporting an adjusted gross income (AGI) less than $150,000 on their 2020 tax return. The IRS has identified over 10 million people who filed their tax returns before the plan became law and is reviewing those returns to determine the correct amount of tax on their unemployment compensation. For those affected, this could result in a refund, a reduced tax bill, or no change at all.

The IRS is recalculating impacted tax returns in two phases. It started with tax returns from single taxpayers who had relatively simple returns, such as those filed by people who didn't claim children as dependents or any refundable tax credits. The tax agency will then adjust returns for married couples filing jointly who are eligible for an exemption up to $20,400 and others with more complex returns.

Ryan Dodson has a Masters in Accounting from North Carolina State University. He worked in public accounting with Deloitte and Arthur Andersen. He and his wife Tiffany own and operate Liberty Tax Service.

405 East Dixie Drive•Asheboro, NC 27203 (336) 629-4700

The new tax exemption only applies to unemployment benefits received in 2020. So, if you receive unemployment compensation in 2021 or beyond, expect to pay federal tax on the amount you get.

As for state taxes, just because the federal government is waiving taxes on the first $10,200 of your 2020 unemployment benefits, that doesn't mean your state will too. And North Carolina does not follow the federal exemption, so do not expect to see any refund coming back from the state.

Refunds for Unemployment Compensation

If you're entitled to a refund, the IRS will directly deposit it into your bank account if you provided the necessary bank account information on your 2020 tax return. If valid bank account information is not available, the IRS will mail a paper check to your address of record. The IRS says it will continue to send refunds until all identified tax returns have been reviewed and adjusted.

The IRS will send you a notice explaining any corrections. Expect the notice within 30 days of when the correction is made. Keep any notices you receive for your records, and make sure you review your return after receiving an IRS notice.

The refunds are also subject to normal offset rules. So, the amount you get could be reduced (potentially to zero) if you owe federal tax, state income tax, state unemployment compensation debt, child support, spousal support, or certain federal non-tax debt (i.e., student loans). The IRS will send a separate notice to you if your refund is offset to pay any unpaid debts. Should I File an Amended Return?

Although the IRS says there's no need to file an amended return, some early filers may still need to, especially if their recalculated AGI makes them eligible for additional federal credits and deductions not already included on their original tax return.

The IRS, for example, can adjust returns for those taxpayers who claimed the earned income tax credit and, because the exemption changed their income level, may now be eligible for an increase in the tax credit amount which may result in a larger refund. That said, taxpayers will need to file an amended return if they didn't originally claim the tax credit, or other credits, but now are eligible because the exclusion changed their income, the IRS said. These taxpayers may want to review their state tax returns as well.

Withholding from Unemployment Compensation

Again, the $10,200 exemption only applies to unemployment compensation received in 2020. So, to avoid a big tax bill when you file your 2021 return next year, consider having taxes withheld from any unemployment payments you receive this year.

Contact the NC Employment Security Commission to have federal income taxes withheld from your unemployment benefits.

If you receive a notice from the IRS about your additional refund and are not about their calculation feel free to bring the notice and your tax return in to see. We will take a look at the notice for no charge and advise you on your next steps. We can be reached at 336-629-4700 or visit us at 405 E. Dixie Drive in Asheboro.