If you were one of those who paid your taxes early on any federal unemployment benefits from last year, you could be receiving a refund around the corner.
Millions of Americans could get refunds on taxes they paid for benefits of up to $10,200 that they received in 2020.
This comes in the backdrop of President Joe Biden’s $1.9 trillion Covid-19 relief bill that was passed in March. While another stimulus check is nowhere in sight, this tax break from Biden will return nearly $25 billion to Americans to help cover household expenses or pay off debt, according to reports.
Here’s everything you need to know if you were one of those who claimed unemployment benefits last year and you’re still claiming them this year.
The backstory: How did it happen?
The coronavirus pandemic that struck last year sent millions of Americans home without work. For the first time, working professionals and people who had never been out of work filed for unemployment benefits.
When it was time to pay taxes, many were in for a shock over how much tax they owed on the benefits they received over the year.
Before the stimulus bill was signed in March, nearly 10 million taxpayers who could have benefited from the relief package had already filed their taxes and paid what they owed on their benefits, based on IRS records.
In turn, the IRS has now started issuing refunds to these taxpayers. The simplest of returns comes first — single taxpayers who didn’t claim any dependents or refundable tax credits.
After this group, the IRS will move to other types of returns, hoping to wrap up the corrections before the summer ends.
Who qualifies for a refund?
If you had an income less than $150,000 and claimed federal unemployment benefits last year, you are eligible to receive the refund.
Benefits for people without employment are taxed just like any other income. When Biden’s bill passed, it rewrote the rules for 2020 so that individual taxpayers who received federal unemployment benefits will not have to pay tax on the first $10,200 they received while couples who filed together will be exempt from paying taxes on $20,400 of benefits.
If you are one of those who missed the May 17 deadline and are yet to file your taxes for last year, now is the time. You won’t get a refund but your benefits up to the $10,200 limit won’t be taxed.
What do you have to do now?
If you were one of those who already filed your taxes before the law was passed, you don’t have to do anything. Over the next couple of months, you can expect automatic refunds from the IRS to drop into your accounts – this could vary from $1,000 to $3,800, according to reports.
If you have not given the tax agency your banking information, you will receive the refund as a check in your mail.
Those who are set to receive the refunds will also get a notice from the IRS explaining the correction within a month of issuing the refund. Hold on to the notice for your records and to make sure the money adds up.
Take this news with a pinch of salt though. While the IRS may have waived federal taxes on your unemployment benefits, you might still have to pay some tax on that money. Depending on where you live, your state may charge income tax on your benefits.
What changes this year?
Biden’s relief bill only made exemptions for 2020. That means, if you are still banking on drawing unemployment benefits this year, you may want to set aside some funds to pay your taxes next spring.
With the country opening up, the expansive vaccination drive and the CDC’s easing of face masks for those who are fully vaccinated, the rate of unemployment in the US has dropped significantly.
According to reports, the rate hit 6.1% in April — down from a record high of 14.7% in the same month in 2020.
The situation looks optimistic and with businesses getting back on the road to recovery, many employment opportunities are also presenting themselves for the workforce.