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The $1.9 trillion coronavirus relief bill that passed into law earlier this month is doing a lot for struggling Americans. First of all, the quick signing of the bill means stimulus payments are hitting recipients' bank accounts already. The bill also helps jobless people by boosting and extending unemployment benefits. Plus, it exempts a portion of unemployment income from taxes.
Normally, unemployment benefits are taxed at the federal level and some states impose their own taxes on them as well. But as part of the new relief bill, jobless workers are entitled to a federal tax break on their first $10,200 of unemployment benefits. This rule applies to those with an income of less than $150,000 in 2020.
This rule works to a lot of people's advantage, as paying less tax means getting to keep more of their unemployment benefits to themselves. There's just one problem -- a lot of people have already filed their 2020 tax returns. And that means they've already paid taxes on their unemployment benefits and didn't claim a refund. Here's what to do if that situation applies to you.
Sit tight for new instructions
If you collected unemployment benefits in 2020 and haven't yet filed last year's return, your best bet is to hold off. The IRS is expected to issue guidance on the matter shortly, and since there's still roughly another month between now and when taxes are due, you should be in a position to sit tight and wait.
But what if you rushed to file your 2020 taxes already, either to get the task over with or to expedite your tax refund? You may have either already paid taxes on that $10,200 in unemployment benefits up front (by having federal tax withheld when you got your benefits), or you may have paid those taxes along with your return. If that's the case, don't rush to file an amended tax return.
Normally, amended tax returns come into play when a person's tax liability changes, for better or for worse. For example, if you claim $60,000 of income on your taxes but then realize after you file that you neglected to include another $5,000 of freelance earnings, you'd file an amended return with the correct amount. This time around, the IRS is asking filers who received unemployment benefits in 2020 not to file amendments just yet, because the agency will most likely release a specific worksheet for reporting unemployment income and reconciling tax liabilities associated with it.
In other words, whether or not you've filed your taxes already, if you got unemployment benefits last year, your instructions are the same -- don't do anything yet but wait for further guidance. The downside of having to wait is that it could delay your refund. Plus, if you're claiming a missed stimulus check from 2020 on your tax return, that could be delayed, too. But waiting a few more weeks for your money could be a much better bet than amending your return incorrectly, or filing erroneously in the first place, and having to deal with that headache.
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