Unemployment Law Changes and Your Tax Return: Questions and Answers
The American Rescue Plan included a change to the 2020 tax law regarding unemployment compensation. The bill stated that up to $10,200 of unemployment compensation paid in 2020 is excluded from your income, which means you don’t have to pay tax on unemployment compensation of up to $10,200.
NOTE: This federal law does not apply for Wisconsin tax purposes. The state of Wisconsin continues to tax unemployment compensation as they normally would. There is no need to amend any Wisconsin tax returns due to unemployment.
Here's some frequently asked questions about the latest changes to unemployment benefits.
How do I know I qualify? Taxpayers that claimed unemployment benefits in 2020 are eligible if their adjusted gross income (AGI) is less than $150,000. If you are married, each spouse receiving unemployment compensation doesn’t have to pay tax on unemployment compensation of up to $10,200, but the total AGI must still be under $150,000. Amounts over $10,200 for each individual are still taxable. If your modified AGI is $150,000 or more, you can’t exclude any unemployment compensation. If you file Form 1040-NR (U.S. Nonresident Alien Income Tax Return), you can’t exclude any unemployment compensation.
I filed my taxes before the change in the law. What do I need to do? Just hang tight. The IRS announced that they will automatically refund money this spring and summer to people who filed their tax return reporting unemployment compensation before the recent changes made by the American Rescue Plan.
I owed money before these changes and I paid it already. What should I do? Both taxpayers that had refunds and owed will have their returns reviewed. For taxpayers that paid the IRS already, a refund will be issued. For taxpayers that still owe taxes, the refund may be applied to what is owed. The refunds are also subject to normal offset rules. So, the amount you get could be reduced (potentially to zero) if you owe federal tax, state income tax, state unemployment compensation debt, child support, spousal support, or certain federal non-tax debt (i.e., student loans). The IRS will send a separate notice to you if your refund is offset to pay any unpaid debts.
When will I get my refund? The first refunds are expected to be made in May and will continue into the summer. The IRS is recalculating impacted tax returns in two phases. It will start with tax returns from single taxpayers who had relatively simple returns, such as those filed by people who didn't claim children as dependents or any refundable tax credits. The IRS will then adjust returns for married couples filing jointly who are eligible for an exemption up to $20,400 and others with more complex returns.
How will I know my refund is coming? The IRS will send you a notice explaining any corrections. Expect the notice within 30 days of when the correction is made. Keep any notices you receive for your records, and make sure you review your return after receiving an IRS notice.
How will I get the money? The IRS will issue refunds resulting from this effort by direct deposit for taxpayers who provided bank account information on their 2020 tax return. If valid bank account information is not available, the refund will be mailed as a paper check to the address of record.