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August 16, 2021

TAS Tax Tip: More 2021 unemployment compensation exclusion adjustments, and refunds in some cases, coming…

Unemployment Compensation: More 2021 Exclusion Adjustments and in Some Cases, Refunds Coming...

The IRS reported that another 1.5 million taxpayers will receive refunds averaging more than $1,600 as it continues to adjust taxable income amounts based on the exclusion for unemployment compensation from previously filed income tax returns.

Unemployment Compensation Tax Adjustment Information

The IRS began making adjustments to taxpayer’s tax returns in May in the first of several phases, to correct already filed tax returns to comply with the changes under the American Rescue Plan Act of 2021 (ARPA), which allows an exclusion of unemployment compensation of up to $10,200 for individuals for taxable year 2020.

The IRS started with the simplest tax returns and is now reviewing more complex returns. The average refund amount is higher for the second round because the IRS is also adjusting the Advance Premium Tax Credit (APTC), based on additional tax relief provided for in ARPA.

Also, if reducing your AGI for the unemployment exclusion now makes you eligible for a third Economic Impact Payment (EIP) or for more EIP, the IRS will issue your payment by direct deposit or as a paper check separately.

If a taxpayer’s account is adjusted, the IRS will issue a notice, CP 21 or CP 22, within 30 days to inform you of the adjustment and let you know if the adjustment created a balance due, refund, or no change. You should keep any notice you receive for your tax records and use it to verify the adjustment accuracy.

Already filed your tax return?

Most taxpayers need not take any action and there is no need to call the IRS.

However, if, because of the excluded unemployment compensation, taxpayers are now eligible for deductions or credits not claimed on the original return (like the Earned Income Tax Credit), they should file a Form 1040-X, Amended U.S. Individual Income Tax Return.

See the IRS continues unemployment compensation adjustments, prepares another 1.5 million refunds for more information on when you should or should not file an amended tax return.

Need to file an amended tax return?

E-filing is available for amending 2019 and 2020 returns that were originally e-filed. E-filing amended returns will result in much faster processing and refunds. See Form 1040-X, Amended U.S. Individual Income Tax Return, Frequently Asked Questions.

Contact your preferred tax software provider to verify their participation in amended return e-filing, for specific instructions needed to submit an amended return, and for answers to any questions.

An amended return for tax year 2019 or 2020 can also be filed on paper.

Preparing your tax return now or later?

If you are preparing your own tax return, you must first determine if you are eligible for the exclusion by considering whether your Adjusted Gross Income (AGI) is less than $150,000.

Filing electronically is the easiest way to calculate the correct amount. The IRS has worked with the tax return preparation software industry to reflect these updates, so people who choose to file electronically simply need to respond to the related questions when electronically preparing their tax returns.

See New Exclusion of up to $10,200 of Unemployment Compensation for more information and examples. Instructions and an updated worksheet about the exclusion are available, see the Form 1040 and instructions. For additional information and scenarios, see the Unemployment Compensation Exclusion FAQs.

Need more information?

For more information on this topic, see the following Taxpayer Advocate Service, IRS and other government website resources:

TAS

IRS

Department of Labor