We all know the enormous economic impact that the pandemic left behind. Unemployment rates were higher than ever during 2020, but now it seems to be a light at the end of the tunnel. Either way, this doesn’t mean that the crisis is over. Yes, our country is experiencing a fast economic recovery, but there are still thousands of jobless workers all across the USA. The historic $1.9 trillion COVID-19 relief bill is designed to help all people that are having a bad moment right now.
We know that stimulus checks and enhanced health insurance subsidies helped a lot of people, but this is not enough.
With that being said, jobless workers will get an unemployment tax break refund on the money they earned during this crisis. It is important to mention that all income during unemployment is taxable according to the Federal Reserve, but the relief bill now exempts them for their first 10.200 USD of benefits.
But there’s a problem, a lot of people already filed their taxes before having this unemployment tax break announced. Naturally, not all of us were expecting this new provision, which creates a new particular scenario: should I get an unemployment tax refund?
After all, the Government said that all money received by unemployment benefits is exempt from taxes.
So, what should you do?
If you are worried about this new provision, then you should know that you are not alone.
About 40 million Americans received unemployment benefits last year. 2020 will forever be remembered as a year that changed our normality to something different. As a consequence, saving our country’s economy was not an easy task for the government.
It is crucial to comprehend that jobless insurance had to be reported as taxable income, until now.
This legislation excludes only 2020 unemployment benefits from taxes and allows taxpayers who earned less than 150.000 USD in gross income to exclude unemployment compensation. The main problem is that the IRS announced this legislation after some people filed their taxes, so now they have to make an unemployment tax refund.
The tax break refund are expected to take place in May, but they can be delayed a couple of months.
Nonetheless, keep in mind that state taxes are not going to be treated the same way as federal taxes. States need to decide if they will offer a tax break or not.
Some states are for sure going to tax the aid for the jobless, but so far it is impossible to determine without an official statement. For instance, we already know that California, Virginia, Montana, and other states already exempt taxes on unemployment benefits.
Whatever your answer is, this is how you should proceed.
So, the first scenario is for the taxpayers who figured and filed their taxes. In this case, the IRS stated that they are going to determine the correct tax break refund amount that the taxpayer should have paid without the unemployment tax break. The resulting overpayment will be either refunded or applied to other taxes owed.
To summarize, the IRS needs to make the recalculation based on if you are eligible for the 10,200 USD exclusion or not.
In case you haven’t filed your taxes yet, then the process will be a lot easier for you. The IRS already prepared its software for those who file their taxes electronically. There you will find questions related to the exclusion of unemployment compensation, so be sure to answer them right.
Normally, the IRS issued refunds within three weeks if you filed your taxes digitally.
If you decided to file your taxes manually, then your return can take up to six weeks.
Either way, we also know that the tax filing deadline was moved to May 17, even if the IRS wasn’t even planning on moving it after last year’s 3-month delay.
If you are due a refund for last year, remember to fill your taxes as soon as possible, especially if you got a stimulus check during 2020. Don’t forget to be constantly checking the new IRS updates so you don’t miss any information on this topic.