How did this happen?
When the pandemic hit, millions of Americans were pushed out of the workforce. Suddenly, people who’d never been out of work were filing for unemployment benefits for the first time.
And then when tax time came, some were surprised by how much tax was owing on the benefits they received over the year.
Then, by the time the bill was signed in March, 10 million taxpayers who could benefit from the relief provision had already filed their taxes and paid what they owed on their benefits, according to IRS records.
Taking a phased approach, the IRS has now started issuing refunds to those taxpayers. It says it’s starting with the simplest returns — single taxpayers who didn’t claim any dependents or refundable tax credits.
Once the agency has finished with that group, it will move on to the more complex returns, with a goal of wrapping up the corrections by the end of the summer.
Who qualifies for a refund?
Anyone with an income below $150,000 who claimed federal unemployment benefits last year is eligible for the refund.
Typically, unemployment benefits are taxed like any other income.
Biden’s legislation changes the rules for 2020 to ensure individual taxpayers who received federal unemployment benefits won’t have to pay tax on the first $10,200 they received, while couples filing jointly will be exempt from paying taxes on $20,400 of benefits.
If you missed the May 17 deadline and still need to file your taxes for 2020, you’ll want to do that now. While you won’t get a refund, your benefits up to the $10,200 limit won’t be taxed, which will significantly reduce your tax liability this year.
What do I have to do?
If you already filed your taxes before the law was passed, you don’t have to do anything.
Over the next few months, you should expect the IRS to automatically issue you a refund in the ballpark of $1,000 to $3,800, according to multiple media reports.
If the tax agency doesn’t have your banking information, you’ll receive your refund as a paper check in the mail.
You should also receive a notice from the IRS explaining the correction within 30 days of receiving your refund. The IRS suggests holding onto that notice for your records and to review your return to ensure all the details match up.
However, keep in mind that even though the IRS waived federal taxes on your unemployment benefits, you may have to pay some tax on that money. Depending on where you live, your state may charge income tax on your benefits.
And if you owe your state or federal government any past-due taxes, for child or spousal support or student loans, the government could seize your refund, according to the Taxpayer Advocate Service.
What about this year?
Unemployment hit 6.1% in April, according to the Bureau of Labor Statistics — down from a record high of 14.7% in the same month the year before.
And with nearly 60% of the population having received at least one COVID shot, based on CDC stats, there’s reason for optimism that the economy and workforce are on the mend after the pandemic.
One industry that has been hit especially hard through the pandemic even recorded gains from April 2020. The leisure and hospitality industry added 5.4 million jobs over the year, but employment in the industry is down by 2.8 million, or 16.8%, compared to February 2020.
Biden’s relief bill only exempted taxes for 2020. If you’re still drawing unemployment benefits in 2021, you’ll want to start setting aside funds for taxes next spring.
What to do if you need money right now
If you can’t wait a month for your refund and you need a little help with your bills right now, you have a few options.
Slash your insurance premiums. Having insurance is a must, but overpaying is not. If you think your car insurer is taking you for a ride, it may be time to shop around for a better deal. And while you’re looking, why not also save hundreds on homeowners insurance by comparing rates to find a lower price?
Get an education in savings. With $1.6 trillion in student loan debt reported last year, Americans are paying a hefty price for higher education. But simply refinancing your student loan could save you hundreds of dollars a month and help you pay it off sooner.
Find your own refund in your current budget. By finding a few creative ways to cut back, you can possibly rearrange your budget to find another chunk of cash. Plan your shopping list before you go to the grocery store to avoid impulse buys. And after you’re done at the shops, earn some cash back just by taking photos of your receipts. Have a hobby or special talent? Set up a freelancer profile and turn it into a side hustle to bring in extra income. And, you can download a free browser extension that will automatically scour for better prices and coupons whenever you shop online.
Dip your toe into investing. Don’t have much experience or an expansive budget to get into investing? There’s an app for that. Download a popular app that allows you to invest with your "spare change” and turn pennies into a diversified portfolio.