An Unexpected $10,200 Unemployment Tax Break: What to Know

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In the massive stimulus package enacted earlier this month, lawmakers inserted a last-minute exemption for many taxpayers with up to $10,200 of unemployment payments for 2020. Normally this income is fully taxable on federal returns, so the change could save many filers $1,000 or more.

The brain twister, for the agency and affected taxpayers, is how to apply a retroactive tax break in the middle of filing season when millions have already submitted returns.

This recent change has piled yet another burden on the Internal Revenue Service this year. In January it had to delay processing tax returns by about two weeks, until Feb. 12, to reprogram its computers due to tax changes in the relief law Congress passed late in 2020. Then in mid-March, the agency postponed the April 15 tax-due date to May 17 for most individuals due to pressure from lawmakers and tax professionals.

On March 23, the IRS released fresh guidance on the new break for unemployment payments, both for those who already filed 2020 returns and those who haven’t. Among other things, the agency revised the benefit to be more generous to taxpayers who have received unemployment payments and are bumping up against its income limit.

“This change is wonderful. It makes a big difference to people with unemployment payments and helps some of them qualify for new stimulus payments,” says Chris Mooney, a CPA with Luby & Thomson in Bellevue, Wash.

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