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Important Tax update due to New Law regarding
Unemployment Benefits

IRS to recalculate taxes on unemployment benefits; refunds to start in May

IR-2021-71, March 31, 2021 — To help taxpayers, the Internal Revenue Service announced today that it will take steps to automatically refund money this spring and summer to people who filed their tax return reporting unemployment compensation before the recent changes made by the American Rescue Plan.



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.


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