Did you pay taxes on unemployment benefits? You may be getting a refund from IRS

Millions who paid taxes on unemployment benefits in 2020 could get a refund from the Internal Revenue Service.

The IRS said last week it was sending out 2.8 million payments to eligible taxpayers — but more are qualified. Here’s what to know about how they work, who gets them and more.

What the payments are for

The payments are refunds for some taxpayers who filed their 2020 returns before the American Rescue Plan — the $1.9 trillion COVID-19 relief package passed in March — made some unemployment compensation tax-exempt.

“Earlier this month, the IRS began its programming review of tax returns filed prior to the enactment of ARPA to identify the excludible unemployment compensation,” the agency wrote Friday.

Now, it says it’s sending out 2.8 million refunds, with another set expected to go out in mid-June.

The IRS says it’s also “making corrections” for Earned Income Tax Credits, Premium Tax Credits and Recovery Rebate Credits that are “affected by the exclusion.”

How much are the payments worth?

The American Rescue Plan exempted from income up to $10,200 in unemployment benefits received in 2020 per taxpayer — meaning recipients didn’t have to pay taxes on benefits up to that amount.

“If you are married, each spouse receiving unemployment compensation doesn’t have to pay tax on unemployment compensation of up to $10,200,” the IRS says.

But the IRS said Friday that $10,200 is just the “maximum amount that can be excluded when calculating taxable income” and not the amount of the refund.

“The IRS will determine the correct taxable amount of unemployment compensation and tax,” the IRS says. “Any resulting overpayment of tax will be either refunded or applied to other outstanding taxes owed.”

Who is eligible?

The American Rescue Plan exempted portions of unemployment compensation for taxpayers who made less than $150,000 in “modified adjusted gross income.”

Those who made more than $150,000 cannot exclude any unemployment benefits from their income.

Taxpayers who are qualified for the American Rescue Plan’s exemption but who filed their taxes before it became law may be eligible for a refund from the IRS.

The IRS says it’s found 13 million taxpayers who may receive a refund.

How the payments work

Most taxpayers eligible for a refund will not have to file an amended tax return, the IRS says.

The IRS says some taxpayers will receive the refunds as payments while some will have them applied to taxes or other debts they owe. Others will see no change.

“Taxpayers who have qualifying children and who become eligible for EITC after the exclusion is calculated may have to file an amended return to claim any new benefits,” the IRS says. “The IRS can adjust tax returns for those who are single with no children and who become eligible for EITC. The IRS also can adjust tax returns where EITC was claimed and qualifying children identified.”

The IRS said it had reviewed over 3.1 million returns, 2.8 million of which received refunds, as of Friday.

Its reviews will continue during the summer, and the IRS says it will “review the simplest returns” first then turn to “more complex returns.”

“Taxpayers will receive letters from the IRS, generally within 30 days of the adjustment, informing them of what kind of adjustment was made (such as refund, payment of IRS debt payment or payment offset for other authorized debts) and the amount of the adjustment,” the IRS says.