Congress’ recent move to retroactively make a portion of 2020 unemployment income tax-free is creating havoc during this year’s tax filing season. Here is what you need to know.
Unemployment compensation was received by millions of Americans during 2020 because of the pandemic. While unemployment income was necessary for many who lost a job, it’s also normally classified as taxable income to be reported on your tax return. Recently-passed legislation now makes the first $10,200 ($20,400 for married filing joint tax returns) of 2020 unemployment compensation tax-free. This tax-free unemployment income is available for those with adjusted gross income under $150,000.
The new legislation which contains this tax break didn’t become law until March of 2021, a full three months after the end of the tax year and after millions of Americans had already filed their 2020 tax return!
Understanding your situation
- If you’ve already filed your 2020 tax return: The IRS recently announced it is going to automatically process refunds for unemployment earnings that should not be taxed beginning in May. It will start with unmarried tax returns and finish with married filing joint tax returns that qualify to exclude unemployment income. This will avoid the need to file an amended tax return for most taxpayers unless the reduced income allows you to qualify for other tax benefits like the earned income tax credit. So there is no need for most taxpayers to file an amended tax return.
- If you HAVE NOT filed your 2020 tax return: The IRS now has guidance on how to report this tax break on your 2020 tax return if you have not already filed.
- Tax deadline moved to May 17. Because of all this havoc, the April 15 deadline for individual tax returns is now May 17. This extension applies only to Form 1040s. First quarter estimated tax payments for the 2021 tax year are still due by April 15.
Be assured you will be informed once the IRS issues further instruction on how to claim your tax break. In the meantime, enjoy the extra tax savings you’ll get sometime in the near future!