Filed Taxes and Missed the $10,200 Unemployment Exclusion? Don’t Amend Your Return

More COVID-19 relief is here via the latest stimulus bill, called the American Rescue Plan Act (ARPA), and many taxpayers have already gotten their stimulus payments.

However, other specifics in the law, though fantastic for helping with financial burdens, have been the source of some confusion—specifically, the retroactive exemption for unemployment benefits.

Let’s look at this significant tax relief and talk about why you don’t need to amend your return to get your additional refund.

Tax-Free Unemployment Benefits

For the entirety of 2020, ARPA has made the first $10,200 of unemployment benefits, per spouse, tax-free. This is a retroactive move, meaning it changes the rules about how something is taxed after the fact.

Some people may have chosen to have taxes withheld from their benefit payments, while others may have already paid taxes on those payments if they filed before ARPA was signed into law. In both cases, taxpayers have already paid a tax bill that they might no longer owe.

So how do you get it back? Typically, if you find out that your tax return wasn’t complete, you file an amended return to get everything in order. But in this case, the IRS has said don’t file an amended return just yet—it is working on plans to make the adjustment on your account and send you any additional refund you are owed.

At this time, the IRS has not released a timeline for these adjustments and refunds. We anticipate more on that in the near future at the IRS Newsroom, but it has made it clear that it does not want you to file an amended return to claim the exclusion at this time.

The unemployment exclusion impacts Adjusted Gross Income—and here’s why that matters

Adjusted gross income (AGI) is used to determine your eligibility for a number of deductions and exclusions from income, such as the tuition and fees deduction, the IRA deduction, taxable Social Security benefits, the student loan interest deduction and the Premium Tax Credit.

What appears to be a simple change to reporting your unemployment benefits has a ripple effect throughout the tax code. But when you use 1040.com, you don’t have to worry about this. When these law changes occur, we work closely with the IRS and state tax agencies to update our filing app accordingly.

What else changed for 2020 in ARPA?

The Advance Premium Tax Credit (APTC) lets you use a portion of the Premium Tax Credit throughout the year to help offset your monthly health insurance premiums, instead of waiting to receive the full amount when you file your taxes.

If you receive more than you needed to cover your monthly payments, you would have to pay the excess back when you file your return, but this year, ARPA removes the requirement to pay back any excess—yes, another retroactive law change.

Again, many may already have filed and paid the excess amount that the APTC distributed, and naturally they would be keen on getting that back as soon as possible. But the IRS has yet to release guidance on this particular change. It is unclear whether an amended return will be necessary or if the IRS will work its magic on this one as well. Stay tuned.

A note on states—yours may not conform to the federal rules

While unemployment compensation was retroactively made tax-free on the federal level, your state may not conform to the federal rules. Some states always provide tax-free unemployment benefits; others never do, and still others have different rules entirely.

Be sure to check your state’s official website for more information.

Stimulus timeline, amounts, and more

Have more questions about ARPA and how it may affect you? Check out our Tax Guide articles for more info:

• Stimulus Payment Amounts and Qualification
• Delivery Timelines for Stimulus Payments
• COVID-19 Tax Relief for Student Loan Borrowers
• Child Support, Debt, and Your Stimulus Payments
• COVID-19 Relief Legislation

You can get started on your taxes and save as you go with 1040.com!

We at 1040.com work tirelessly to keep our filing platform up to date. The new Unemployment Exclusion Worksheet is now available and will automatically calculate your exclusion amount. Changes related to the Advance Premium Tax Credit will be added in a future update once the IRS provides final guidance. Use our smart, simple walkthrough and file your taxes for $25. Sign up or log in today to get started!