IRS tax refunds on unemployment benefits begin hitting accounts

For some, the large deposits hitting some bank accounts have been eagerly anticipated. For others, the cash — sometimes thousands of dollars — came as a surprise.

The Internal Revenue Service said Friday that it had begun sending out the first 2.8 million refunds of taxes paid on unemployment compensation last year. When Congress passed the American Rescue Plan Act in March, pandemic relief measures included making up to $10,200 of jobless benefits tax-free retroactively for 2020.

But by then, millions had already filed their tax returns — so the IRS owes those filers some or all of the taxes they paid or had withheld from those benefits. Taxpayers who filed their returns after the new law was signed were able to take advantage of the change.

This week’s refunds are only the start, with millions more to come through the summer, the IRS says.

The long review process has resulted in some impatience among unemployment claimants who say they could use the extra money sooner than later.

Here’s what to expect

The calculation works by reducing the filer’s taxable income by the total jobless benefits received, up to the $10,200 limit, and then reapplying the proper tax rate to determine how much was overpaid.

The next batch of refunds is expected to go out in mid-June. The IRS says it’s identified 13 million taxpayers who “may be eligible for the adjustment,” according to a news release.

The work is slow-going: The agency says it has reviewed more than 3.1 million returns since mid-May, resulting in the 2.8 million account deposits or checks issued this week. The remainder were not owed money back for a variety of reasons, including because they had other taxes due or owed other debts.

Most don’t need to file amended returns

The IRS has urged most taxpayers affected by the change in tax exclusion for jobless benefits to wait for the automatic refunds instead of filing an amended return.

It’s focusing first on reviewing the simplest tax returns — those for single filers who don’t have dependents. CBS News reported that the agency then will review returns for married couples and heads of household, who are single or unmarried taxpayers claiming children or other dependents. Those filers likely won’t receive refunds until later in the summer.

The one situation in which the IRS urges taxpayers to refile an amended return is for some parents with children who didn’t qualify for the Earned Income Tax Credit on their original return because the unemployment compensation increased their income over the cutoff. They would be entitled to an extra refund if the new deduction of taxes on the jobless aid lowers their income below the EITC cutoff.

However, the IRS says single filers with no children who were in a similar situation will have their numbers automatically adjusted and, if they’re eligible, a refund issued.

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