The American Rescue Plan Act of 2021 (ARPA) allows eligible taxpayers to exclude from taxation up to $10,200 in Unemployment Benefits for the 2020 tax year. Under normal circumstances, Unemployment Benefits are taxable at the federal level but the recently passed ARPA, which occurred halfway through the 2020 tax filing season, allowed eligible taxpayers to exclude part of their benefits to lower their taxable income.
Taxpayers who submitted their returns prior to ARPA passing did not receive the benefit, and therefore were subject to income taxes on 100% of their Unemployment Benefits. Per the IRS, taxpayers were instructed to not amend their returns and wait for the IRS to recalculate the taxes and issue the refunds.
The IRS plans to issue refunds starting June 2021 and will start with the simplest tax returns and work their way to more complex returns.
The ARPA included other tax benefits in addition to the Unemployment Compensation exclusion, so it is recommended taxpayers review their eligibility for more tax savings, and potentially a larger refund. In addition, it is highly recommended that taxpayers review their refunds to ensure the refunds were properly calculated so that you receive all the tax benefits you were entitled to.