Personal finance

Tax Refunds on Unemployment Benefits Still Delayed for Thousands

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  • The American Rescue Plan Act waived federal tax on up to $10,200 of 2020 unemployment benefits per person. President Joe Biden signed the pandemic relief law in March.
  • The IRS has identified 16 million people to date who may qualify for an associated tax refund or other benefit. The agency had sent more than 11.7 million refunds worth $14.4 billion as of Nov. 1.
  • The IRS plans to send another tranche by the end of the year.

Thousands of taxpayers may still be waiting for a tax refund on unemployment benefits collected during the Covid pandemic, as the IRS grapples with a backlog of tax returns.

The American Rescue Plan Act, a pandemic relief law, waived federal tax on up to $10,200 of unemployment benefits a person collected in 2020, a year in which the unemployment rate climbed higher than any time since the Great Depression.

However, many people eligible for the tax break had filed their annual tax returns before President Joe Biden signed the legislation on March 11.

That means they overpaid their federal tax bill and may qualify for a refund. (In other cases, an overpayment is applied to unpaid taxes and debts.)

To date, the IRS has identified more than 16 million total people who may qualify for the tax break. The agency has sent over 11.7 million refunds worth $14.4 billion, according to the most recent data.

Payments started in May; the IRS had indicated they'd continue into the summer and fall. It's unclear how many people are still waiting, though. (Not all the people the IRS identified as potential candidates will necessarily qualify.)

The IRS plans to issue another tranche of refunds before the end of the year. The agency sent about 430,000 refunds totaling more than $510 million in the last batch, issued around Nov. 1. The average refund was about $1,189.

An IRS spokesperson didn't specify how many payments the agency is releasing or when it's doing so.

Complex returns

Delays have largely affected taxpayers with complex returns. They may include, for example, a married couple in which each spouse received benefits in 2020.

A couple's tax calculation can be more complicated than it is for a single taxpayer. Each spouse is entitled to exclude up to $10,200 of benefits from federal tax. But that doesn't mean the couple, as a tax unit, always gets tax waived on double the amount ($20,400).

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Let's say one spouse collected $5,000 in unemployment benefits in 2020, and the other got $25,000. This couple would exclude $15,200 of benefits from tax (instead of the full $20,400). That's because the latter spouse can only exclude up to $10,200 of benefits.

"The review of returns and processing corrections is nearly complete as the IRS already reviewed the simplest returns and is now concentrating on more complex returns," according to an agency statement in November.

Not all taxpayers qualify for the unemployment tax break. For example, they're not eligible if their modified adjusted gross income (which doesn't include unemployment compensation) was $150,000 or more.

Congress hasn't passed legislation offering a tax break on benefits collected in 2021.  

IRS backlog

The IRS is contending with a backlog of individual tax returns. The bureau had 6.7 million unprocessed individual returns as of Dec. 4.

The IRS has had a busy year (implementing new rules around stimulus checks, unemployment compensation and monthly payments of the enhanced child tax credit, for example) following one in which the pandemic upended its in-person operations. It has also been contending with an elevated rate of identity fraud.

Most unprocessed returns include those with errors or that require "special handling" from an IRS employee. In these cases, it's taking the IRS more than the typical 21-day time frame to issue related refunds, in some instances stretching to between 90 days and 120 days.

The number of returns requiring special handling hit a historical high of 9.8 million on May 1 this year; the agency had whittled that down to 61,000 by Dec. 4.

"We're working hard to get through the backlog," the agency said. "Please don't file a second tax return or contact the IRS about the status of your return."

An IRS website has answers to some frequently asked questions about tax refunds.

Amended return

Most taxpayers will receive their unemployment refunds automatically, via direct deposit or paper check. They don't need to file an amended tax return.

There are some exceptions, though.

For example, excluding up to $10,200 of unemployment compensation from one's income may make some taxpayers eligible for a tax credit or deduction that they didn't claim on their original return. In this instance, taxpayers would need to file an amended tax return to claim that new credit or deduction.

(However, this isn't the case with all credits and deductions, such as the Recovery Rebate Credit, Premium Tax Credit, or Earned Income Tax Credit with no qualifying children; the IRS will calculate and send payments automatically in these cases. The IRS is also sending notices to some taxpayers who may now qualify for the child tax credit; taxpayers who respond to the notice don't have to file an amended return.)

Taxpayers can consult this IRS website for questions related to the unemployment tax break.

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