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When to expect unemployment tax break refund: who will get it first?

The IRS will begin in May to send tax refunds in two waves to those who benefited from the $10,200 unemployment tax break for claims in 2020.

The IRS will begin in May to send tax refunds in two waves to those who benefited from the $10,200 unemployment tax break for claims in 2020.

As part of the American Rescue Plan those that claimed unemployment compensation in 2020 will receive a $10,200 tax waiver per individual. Unemployment benefits are taxed by the federal government, which came as a surprise to many of the 40 million who had never previously received jobless aid.

When President Biden signed his first major piece of legislation in March, which included the tax break to those who claimed unemployment benefits in 2020, tax season was well under way. To avoid making taxpayers amend their tax returns the IRS went back and recalculated the filings to account for the tax break.

The IRS will process tax returns in two phases

In an announcement the IRS informed that the agency would handle the automatic adjustments in two stages with refunds expected to begin in May. The agency said it would start with individual tax returns first, followed by those with a filing status of married filing jointly and more complicated returns. This means married couples who filed jointly will have to wait longer to get their refund if they have one coming to them than most who filed an individual tax return.

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This is due to the complexity of calculating refunds for a married couple based on the tax break. The American Rescue Plan waived federal tax on up to $10,200 of unemployment compensation per person, that rule also applies for married couples filing jointly. Although the couple could receive up to $20,400 if both collected jobless aid in 2020, only half that amount could be applied to each.

The IRS gives the example of one spouse having received $5,000 of benefits and the other getting $20,000. The total amount is $25,000 but the couple would not be entitled to the full $20,400 waiver but only $15,200. The spouse that got $5,000 in compensation gets the whole amount waived, but the second spouse only gets $10,200 of the $20,000.

When will the IRS send tax refunds?

When President Biden signed the American Rescue Plan into law over 66 million taxpayers had already sent their tax return to the IRS. The tax agency for its part had already processed and sent refunds to 42-plus million filers. Now the agency has begun reviewing the tax returns of those who claimed unemployment benefits according to their timeline.

The agency will automatically send a refund to those who may have overpaid their taxes having claimed the full amount they received in unemployment benefits. However, the agency has yet to give any further details on the readjustment process for filers who received unemployment benefits in 2020. Nor has the IRS said when the second phase, readjusting married filing jointly returns, will start.

Its likely that the IRS will need to cross-reference the 1099 tax forms for unemployment income sent by state labor bureaus to verify how much each spouse received in jobless aid according to Janet Holtzblatt, a senior fellow at the Urban-Brookings Tax Policy Center talking with CNBC. But she added that the exact method the IRS will use is unclear.


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