The last two years have been nothing short of eventful because of the unprecedented impacts of covid-19. On top of this the unemployment rate increased significantly in the United States initially before declining. However, as of this writing there are still 6.9 million people that are unemployed according to the Bureau of Labor Statistics. A case can easily be made that being unemployed amidst a pandemic is a devastating combination. Fortunately this hasn’t gone unnoticed and in addition to other benefits such as with student loans the government has taken action to help people struggling. The IRS Unemployment Refund is another action taken by the United States government to support its people. We provide an update view of what the IRS Unemployment Refund is, in addition to some helpful facts about the program.
What is the IRS Unemployment Refund?
The way taxation normally works, if you are unemployed and you receive monetary benefits, those benefits are taxable. Therefore someone that received for example $5,000 is unemployment compensation would have to pay the government a portion of that in taxes. However, this changed following the passage of the America Rescue Plan Act in early 2021. Specifically, the law allowed taxpayers that earned below $150,000 to exclude unemployment compensation from their income for tax purposes. By excluding the compensation you are in effect no longer required to pay federal tax on that income. This provision was also enacted retroactively. What this means is that for taxpayers who had unemployment compensation in 2020 and earned below $150,000, they paid federal taxes that they shouldn’t have. Therefore the IRS has to refund this amount. This is why its referred to as the IRS Unemployment Refund.
1. Billions of Dollars in Refunds Have Been Issued
In May the IRS indicated that they had identified over 10 million taxpayers who could be eligible for a refund. This figure increased to over 16 million in the following months. These taxpayers filed their tax returns before the American Rescue Plan became law. As of this writing, the IRS has issued over 11.7 million refunds totaling $14.4 billion. This amounts to an average refund of approximately $1,189 per person so far.
2. The American Rescue Plan Made This Happen
When President Joe Biden came into office, he started work on creating what is now known as the American Rescue Plan Act (ARPA). On March 11, 2021, ARPA was signed into law. The act is essentially a rescue package intended to help Americans deal with the hardships caused by the covid-19 pandemic on both the economy and individuals’ economic well being. The passing on ARPA kickstarted the IRS unemployment refund program.
3. There’s a Limit To The Size of the Refund
To qualify for the IRS Unemployment Refund, taxpayers need to have income below $150,000. Once this has been determined, the IRS then has to calculate how much of a refund each eligible person is owed. The maximum amount of unemployment compensation a person can exclude from their federal taxable income is $10,200. For those married and filing jointly, this amount increases by a factor of 2 to $20,400. Therefore the maximum amount of refund is approximately $2,300-2,400 for single filers and $4,500 for joint filers. This is based on the income threshold and 2020 tax brackets.
4. The Benefit Doesn’t Extend to 2021
The retroactive nature of the American Rescue Plan’s unemployment tax benefit is why the IRS is having to go through this refunding process. However, the tax deduction benefit does not extend through the 2021 fiscal year. This means that if you received any unemployment compensation in 2021, and are eligible per the IRS guidelines you will have to federal taxes in 2021. At least, this is the opinion of Jackson Hewitt’s chief tax information officer Mark Steber. He points out that at the time of this writing any unemployment compensation you receive in 2021 is fully taxable.
5. There Are Still Millions of Refunds Left
As of this writing the IRS believes there are 16 million taxpayers that could be eligible for the refund. This figure has been growing however. Initially in May the IRS estimated that there were 10 million taxpayers that could be eligible. Therefore, while there are over 4 million people still waiting to receive their refund, the final number might be even greater.
6. There Could Be Additional Benefits
The IRS has also noted that there could be more to come with these refunds. Beyond the unemployment benefits it is currently examining, the IRS has also committed to looking at tax corrections related to the following areas:
- Additional Child Tax Credit
- Earned Income Tax Credit
- Premium Tax Credit
- American Opportunity Credit
- Recovery Rebate Credit
If you have received any of these credits, they’re likely affected by the ARPA’s $10,200 exclusion as well. As such, the IRS will start accounting for any corrections that need to be made for these credits towards the end of 2021. It will also begin sending notices to people who aren’t claiming these credits but may now be able to.
7. The IRS Unemployment Refunds Can Be Auto Deposited
If you are eligible for the refund the IRS will issue it directly to your bank account. This assumes that you use your bank account to pay your taxes in 2020 in which case it would be on your 2020 tax return. That’s the information the IRS will use. If you didn’t use a bank account or a valid account is not available, then the IRS will mail a paper check. They will use your address of record for the paper check, which is likely the address that was on your tax filing for 2020.
Final Thoughts and Timeline of Events
The IRS unemployment refund is a tax correction being carried out on a scale that we have never seen before. The federal government has already released over $10 billion in refunds. And with further refunds to come, both related to unemployment benefits and the various credits mentioned in our fourth fact, it looks like we’re only at the beginning. If you haven’t received a refund or are unsure whether you’re eligible, you can use the IRS’s refund tool to find out more about whether you’re due a refund. There have also been some delays occurring for those who have more complex tax returns. Unfortunately, you can’t directly apply for your refund at the time of this writing. It’s also important to note that the refunds are ongoing. That means your check may be on its way to you as you read this.