KEY POINTS

  • The IRS will begin issuing tax refunds in May
  • The federal tax break would waive up to $10,200 unemployment benefits received in 2020
  • Some states do not exempt unemployment benefits from taxes

The IRS on Wednesday announced it will begin issuing tax refunds in May to Americans who have already filed their returns without claiming the new tax break on unemployment benefits. 

The federal tax break went into effect in President Joe Biden’s $1.9 trillion American Rescue Plan. The measure waived taxes on up to $10,200 unemployment benefits received in 2020 for tens of millions of workers. 

Roughly 40 million Americans received federal jobless benefits in 2020, nonprofit think tank The Century Foundation found. Many were later left with a surprise tax bill. 

The legislation will now allow taxpayers who earned less than $150,000 in adjusted gross income to exclude up to $10,200 of compensation — or $20,400 for married couples filing jointly — from their taxes. 

The IRS would not require those eligible for the tax breaks to file an amended return. The agency would automatically issue the tax breaks, so those eligible need not submit anything else.

“Because the change occurred after some people filed their taxes, the IRS will take steps in the spring and summer to make the appropriate change to their return, which may result in a refund," the IRS said in a statement. "The first refunds are expected to be made in May and will continue into the summer."   

The agency said it is also working with online tax preparers, such as TurboTax and H&R Block, to allow taxpayers to report their unemployment income on their 2020 returns.

“We are awaiting additional guidance from the IRS on how the unemployment exclusion will be implemented,” Lisa Patterson, a spokeswoman for H&R Block, told CNBC

A TurboTax spokeswoman said the company is expecting to make updates available to American taxpayers later this week. 

Until President Joe Biden’s $1.9 trillion American Rescue Plan arrived, unemployment benefits were considered as income for tax purposes. 

Workers may still owe taxes on their state benefits. Some states have already exempted taxes on unemployment, including California, New Jersey, Virginia, Montana and Pennsylvania.

Some states do not levy income, such as Texas, Florida, Alaska, Nevada, Washington, Wyoming and South Dakota.

Other states allow up to $10,200 of the benefits to be excluded from tax. However, amounts in excess will be taxable. Those states include Connecticut, Iowa, Kansas, Louisiana, North Dakota, and Washington, D.C.

US President Joe Biden is expected to unveil an infrastructure plan, with some reports that it could be worth as much as $4 trillion US President Joe Biden is expected to unveil an infrastructure plan, with some reports that it could be worth as much as $4 trillion Photo: AFP / JIM WATSON