Unemployment tax changed drastically during 2020 tax filing season, to help the millions of Americans unemployed during the COVID crisis. If you already filed and were unemployed last year, you will get this unemployment tax break automatically, except in special cases that are more likely to impact women. 

Pandemic unemployment has disproportionately impacted women, especially women of color. So, the American Rescue Plan (ARP), aka the Biden Stimulus Package, passed in March 2021 benefits women in dramatic and important fashion. 

Thanks to the ARP, unemployment compensation up to $10,200 earned in 2020 is tax-free. 

How Do Unemployment Taxes Work?

Over 23 million U.S. workers nationwide filed for unemployment in 2020. For the first time, some self-employed workers qualified for unemployed benefits as well. Usually, unemployment benefits are taxed at the federal level. Historically, self-employed people couldn’t even get them, so their already complex tax situation was not defined.

Generally, your unemployment compensation is not subjected to Medicare and Social Security taxes. Also, your state may or may not tax unemployment (check out this state-by-state guide)

Now, this unemployment tax break only applies to benefits received in 2020. Unless it is extended, any unemployment you receive from 2021 onwards will be fully taxable. Who knows how many unemployment provisions will stay in place. 

Also, the unemployment tax break does not apply if your modified AGI is over $150,000. If your income is higher than that, you still have to pay full tax on your unemployment.

Get An Unemployment Tax Refund If You Already Filed for 2020

Its magic! If you’ve already filed your 2020 taxes, the IRS announced on March 31 they will automatically calculate and send out an unemployment tax refund for returns already filed. Here’s the specific language:

For those taxpayers who already have filed and figured their tax based on the full amount of unemployment compensation, the IRS will determine the correct taxable amount of unemployment compensation and tax. Any resulting overpayment of tax will be either refunded or applied to other outstanding taxes owed.

If this is you, it’s a great time to create an account at irs.gov so you can track how your taxes have been changed as the unemployment tax refund calculations roll this out. Particularly if you owe taxes for 2020.

Should You File An Amended Return Anyway?

This is where AskFlossie gets a little salty, because the answer for many women is YES. Many filers, particularly single mothers, should file amended return to get the 2020 unemployment tax refund.

The IRS Guidance includes this (emphasis mine):

There is no need for taxpayers to file an amended return unless the calculations make the taxpayer newly eligible for additional federal credits and deductions not already included on the original tax return.

For example, the IRS can adjust returns for those taxpayers who claimed the Earned Income Tax Credit (EITC) and, because the exclusion changed the income level, may now be eligible for an increase in the EITC amount which may result in a larger refund. However, taxpayers would have to file an amended return if they did not originally claim the EITC or other credits but now are eligible because the exclusion changed their income.

These taxpayers may want to review their state tax returns as well.

What The IRS Guidance Means

What the IRS is essentially saying here, is if you might newly qualify for..

  • Earned Income Credit
  • Child Tax Credit
  • Stimulus Payments
  • Child Care Credit
  • Education credits and deductions for your college kid or yourself
  • or other tax credits that impact your total income

…you should file an amended return to get the unemployment tax break. For a lot of people, that is hard to figure out in their head. Also, many credits have income thresholds, so the range of tax situations that apply here is broad. 

Finally, guess which tax filers are likely to file for these credits and deductions? That’s right, its the single women with dependents. 

How to File An Amended Return to Get Your Unemployment Tax Break

The IRS also just updated their guidance for how to file an amended return to get the “Unemployment Tax Exclusion, as they are calling it. Here’s how depending on your tax situation:

The fact that the two biggest tax software companies are saying, “But wait. There may be more!” suggests you should not file an amended return until much later in the year. You have three years to file an amended return, so smart women are going to watch and wait on this one. Remember, doing your taxes is self care, especially when you know you’re getting money back!

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