Unemployment Stimulus: Am I Eligible for the New Unemployment Income Relief?

The recently passed third stimulus relief package, known as the American Rescue Plan, expands federal unemployment benefits and provides tax free unemployment benefits.  

If you received unemployment benefits, TurboTax is here to help you understand what all of this means and to help you get every dollar you deserve.

Here is what you need to know:

The bill makes the first $10,200 of federal unemployment income ($20,400 for married filing jointly) tax-free for households with income less than $150,000. The legislation excludes only 2020 federal unemployment benefits from taxes, not unemployment income received in 2021.

• If you have not filed your 2020 tax return, yet, TurboTax is up to date with the new law and will guide you on how to claim these additional unemployment benefits on your tax return. 
• If you already filed your 2020 tax return, you do not need to do anything to get these additional unemployment benefits. The IRS announced that they will automatically adjust your return and send any additional refund amount directly to you. However, some people may now be newly eligible for additional deductions and credits not already included on the original tax return. In these cases, you will likely want to amend your return to claim these additional dollars. Additional information on this is below.

When will I get my additional unemployment refund from the IRS?

According to the IRS, they will send payments in two phases:

• Phase 1: The IRS will adjust returns for taxpayers eligible for up to $10,200 exclusion. Payments for phase 1 started the week of May 14.
• Phase 2: The IRS will adjust returns for those married filing jointly taxpayers who are eligible for the up to $20,400 exclusion and others with more complex returns. 

The IRS issued millions of refunds the first week of June and plans to issue the next set of refunds sometime in mid-June. The IRS will continue to review returns and process corrections during the summer. The IRS is reviewing returns in order from the simplest returns and then to more complex returns.

Taxpayers will receive letters from the IRS generally within 30 days of the adjustment informing them of what kind of adjustment was made and the amount.

How will I receive my additional unemployment refund amount from the IRS? 

The IRS will issue refunds resulting from this unemployment income relief by direct deposit for taxpayers who provided bank account information on their 2020 tax return. 

If valid bank account information is not available, the refund will be mailed as a paper check to the address of record. The IRS will continue to send refunds until all identified tax returns have been reviewed and adjusted.

These refunds are subject to normal offset rules such as past-due federal tax, state income tax, state unemployment compensation debts, child support, spousal support or student loans. The IRS will send a separate notice to the taxpayer if the refund is offset to pay unpaid debts.

How do I know if I am now eligible for additional deductions and credits, and what do I do to get them?

It’s a bit tricky.

The IRS will adjust your return and the amounts for any deductions and credits you claimed on it. For example, say you claimed the Earned Income Tax Credit (EITC) on your return. And because the new unemployment exclusion changed your income level, you would now be eligible for an increase in EITC amount. The IRS would adjust your return for you and send you the additional refund amount with your additional unemployment benefits. You are all set.

The IRS is also making corrections to Earned Income Tax Credit, Premium Tax Credit and the Recovery Rebate Credit since taxpayers may be eligible for these credits with the $10,200 income exclusion.

However, say you were not originally eligible for the EITC on your return, but now, because the exclusion changed your income, you are eligible for the EITC. You may need to amend your return to claim that new credit based on your tax situation:

• The IRS can adjust tax returns for those who are single with no children and the exclusion makes them eligible for EITC.  
• Taxpayers who have qualifying children and become eligible for any new benefits once the exclusion is calculated may have to file an amended tax return to claim new benefits.

If you chose not to amend your return, you’d only get the additional unemployment benefits automatically from the IRS and would miss out on additional money you’d be eligible for. 

The IRS can also adjust tax returns that already include EITC and qualifying children. If you filed with TurboTax, check your inbox. We sent you an email to help you understand how all this affects you and with instructions on what to do.

How do I know how much unemployment income I received?

When it’s time to file your taxes, you will receive Form 1099-G, which will show the amount of unemployment income you received. Form 1099-G will also show any federal taxes you had taken out of your unemployment pay. You are now entitled to exclude the first $10,200 of federal unemployment income from paying any taxes.

Both my spouse and I received unemployment. Are we both eligible?

Under the American Rescue Plan, if you are married, each spouse receiving unemployment compensation doesn’t have to pay tax on unemployment compensation of up to $10,200, if your modified adjusted gross income is less than $150,000.

If I received a subsidy to pay for 2020 health insurance, will I have to include my unemployment income and pay back the advance premium tax credit?

No you will not have to pay it back. Due to the challenges involved in estimating 2020 income when applying for a subsidy, the American Rescue Plan temporarily waives the requirement for taxpayers to pay back excess advance premium tax credits in their 2020 taxes regardless of your income level. In addition, the first $10,200 of your federal unemployment income is tax-free under the American Rescue Plan.

If you filed your 2020 taxes before the American Rescue Plan was passed the IRS will be making adjustments to the Premium Tax Credit since you may be eligible for a bigger Premium Tax Credit with the $10,200 exclusion provided by the American Rescue Plan.

How much are federal unemployment benefits under the third stimulus package? 

The American Rescue Plan provides a $300 increase to federal unemployment payments until September 6, 2021. And freelancers and side giggers will continue to be eligible for unemployment benefits with the extension of the Pandemic Unemployment Assistance (PUA).

We’ve Got You Covered

Don’t worry about knowing these tax laws. No matter what your situation or how you want to file, TurboTax has you covered. With TurboTax you can do your taxes yourself, get help from an expert along the way or hand them off from start to finish to a dedicated tax expert. 

You can find the latest information on the tax changes and announcements in response to COVID-19, here. Also check back with the Unemployment Center for tax tips, advice, and up to date information related to COVID-19 to help you with your taxes and finances in this time of need.