If you received unemployment benefits in 2020 and you've already filed your tax returns, the Internal Revenue Service is saying you don't have to file an amended return to claim the new tax waiver on up to $10,200 of your benefit payments.
President Joe Biden signed the $1.9 trillion American Rescue Plan Act last Thursday, which provides a tax waiver on up to $10,200 of unemployment insurance benefits for 2020 for those earning less than $150,000. The waiver expands up to $20,400 for couples who are married and filing jointly if both partners filed for unemployment. The waiver was a late addition to the package by Democrats who wanted to help out-of-work Americans avoid major surprise tax bills.
However, the IRS has already started the 2020 tax season, and more than 45 million tax returns have already been filed with the IRS, according to the Tax Foundation.
On Friday, the IRS issued guidance that says it "strongly urges taxpayers to not file amended returns related to the new legislative provisions or take other unnecessary steps at this time."
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About 40 million Americans received unemployment insurance benefits last year, according to a recent report from the left-leaning Century Foundation. That amounts to over $580 billion in benefits that are considered taxable income, including the enhanced $600 and $300 weekly payments.
Yet researchers estimate that taxes were withheld on only 40% of unemployment payments, thanks to individuals and states failing to withhold the appropriate amounts.
The IRS said Friday that the agency is currently reviewing the details, including implementation, of the American Rescue Plan. The agency plans to issue additional guidance for Americans who received unemployment benefits in 2020 and already filed their tax returns.
"The IRS will provide taxpayers with additional guidance on those provisions that could affect their 2020 tax return, including the retroactive provision that makes the first $10,200 of 2020 unemployment benefits nontaxable," the agency said in a statement.
For those who haven't filed their 2020 taxes yet, the IRS says it will work to provide a paper worksheet for those filing by mail and work with tax software providers to update questionnaires and forms so that taxpayers can determine how to correctly report their unemployment income on their 2020 tax return.
"The IRS is basically saying to wait on filing any such amended returns," says David Flamer, a California-based CPA. For those who have already filed their taxes, Flamer says it's entirely possible that the IRS will automatically create refunds for these new benefits. "They have the capability to data mine and determine which returns should get such treatment," he adds.
"We are holding all files with unemployment income until the IRS updates its systems, and our software is reprogrammed," says Gina DeRosa, another California-based CPA and certified financial planner. She adds her firm will likely make the call around April 1 on whether to file extensions or not, assuming the IRS does not extend the filing deadline, which is still a possibility.
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