As usual, the IRS will begin automatically issuing tax refunds to people across the country starting next month.
But this year, there is a special tax break connected with the recipe of unemployment benefits. According to one of the recent coronavirus stimulus bills that have been passed, the so-called American Rescue Plan, American households making less than $150,000 per year will not have to pay federal income taxes on up to $10,200 in unemployment benefits which they may have received last year.
This is enormously significant more many people, given how many tens of millions had been prevented from working last year as a direct result of the COVID lockdown mandates.
However, the IRS has recently issued a notice saying that some taxpayers will have to file an amended return if they want to receive that particular tax break.
Why You May Have to Amend Your Return
The reason for this is that there are certain other federal tax credits and deductions which individuals filing their taxes for 2020 are eligible for. Thanks to coronavirus stimulus bills, many people which were not previously eligible for such tax breaks have become eligible for them.
As the IRS said in its statement, “There is no need for taxpayers to file an amended return unless the calculations make the taxpayers newly eligible for additional federal credits and deductions not already included on the original tax return.”
The up to $10,200 in unemployment benefits that fall under this particular tax break are not to be counted as part of modified adjusted gross income.
Thus, if a household earned $140,0000 in 2020 and received $10,200 in unemployment benefits in addition to that, it still qualifies for the unemployment tax break, even though its total income for the year is $150,200.
But because these jobless benefits are excluded from taxpayers’ income, that then automatically causes many people to become qualified various income-dependent tax breaks like the Earned Income Tax Credit, which is intended to support working parents with low incomes. Income tax credits per child for families are another of one of the tax credits that fall under this heading.
The reason why all of this matters is that if you did not originally qualify for any of these tax credits but became eligible for them once your income dropped below a certain threshold after you became unemployed, you will have to amend your return.
Claiming things like the EITC may affect your eligibility for the income tax credit on the unemployment income that you received.
However, the IRS did not specify how taxpayers in such a situation would have to amend their returns. In any case, those who amend their returns in the proper way can see a significantly bigger tax refund come May.