A valuable tax exemption emerging during the heart of tax season is a potential windfall and a new curveball for people trying to get back on their feet after a financially devastating year.
Even though jobless benefits count as income for tax purposes, the newly-signed $1.9 trillion American Rescue Plan will not impose federal income tax on the first $10,200 in unemployment benefits a person received last year.
The exemption applies for households with adjusted gross incomes below $150,000.
Here is the windfall first: The provision could result in individual household tax savings between $1,000 and $2,000, depending on some different estimates.
Here is the curveball: The provision is becoming law after Americans have already filed 55.7 million tax returns with the Internal Revenue Service as of March 5.
It’s safe to say at least some of these returns came from people racing for a badly-needed tax refund after a tough 2020 that sent them to the unemployment line. Now, they have filed their taxes before accessing an exemption meant to help people like them.
Taxpayers who received jobless benefits and have not filed their income taxes should try to wait a little longer, experts told MarketWatch.
Taxpayers who have already filed should also wait, they say. But these people should be prepared to possibly file an amended income tax return that will claim the exemption, the observers added. That’s accomplished with the Form 1040-X.
“Amending your return basically means that you re-file your return, but subtract up to $10,200 of [unemployment insurance] benefits,” according to experts at The Century Foundation. “Depending on your tax rate, that could result in a refund check of more than $1,000.”
Legislative language in the American Rescue Plan’s statute does not contain instructions on what the IRS should do when someone has already filed before the government can assess the income tax exemption.
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