At Least 7 Million Americans in Line for Unemployment Tax Refunds

by Maurie Backman | Updated July 25, 2021 - First published on May 12, 2021

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A check from the United States Treasury.

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Getting money back from the IRS due to the new tax-free unemployment rule? Here are some ideas to help maximize the impact of that refund.

The $1.9 trillion American Rescue Plan is perhaps best known for putting $1,400 stimulus checks in Americans' bank accounts. But that's not all it did. The relief package also boosted unemployment for those still collecting jobless benefits while also making $10,200 in unemployment benefits tax free for 2020. This means that a lot of people who received jobless benefits last year are in line for a refund on their 2020 taxes, which are due May 17.

So far, a good 7.3 million tax returns processed by the IRS are due a refund based on the tax-free unemployment rule. And while the IRS hasn't said how many taxpayers in total it expects to issue refunds for due to this change, that number could climb substantially by the time this year's tax season wraps up.

If you're getting a refund for the taxes you paid on unemployment income last year, here are some things you can do to maximize the impact of this IRS refund.

1. Pad or build emergency savings

If the pandemic has taught us anything, it's the importance of having money in the bank for unplanned expenses or circumstances. So if your emergency fund needs work, put your tax refund directly into savings. Generally speaking, it's a good idea to have at least three months of essential living expenses in your savings account. If you can boost your cash reserves so you have more -- about six months' worth -- even better.

2. Pay off some costly debt

A lot of people had no choice but to rack up debt during the pandemic. And of course many people entered the pandemic with debt hanging over their heads. There's generally no need to rush to prepay a mortgage because interest rates are usually low. But if you're carrying high-interest credit card debt that's costing you a lot of money, then it pays to use your tax refund to pay some of that debt down. The same holds true if you have a personal loan that's hanging over your head.

3. Increase your chances of getting a new job

Though the jobless rate has fallen a lot since peaking a little over a year ago, many Americans are still out of work. If you're one of them, you may be able to use your tax refund to help yourself secure a new job.

If you're lacking certain skills that make it tough to find work, you can use your refund to take a course to teach you what you need to know. Or, it could be that the type of job you want requires a college degree, in which case you could use your refund to help cover tuition. Finally, you may be struggling to find work you can access via public transportation. Your tax refund may be enough to help you put money down to get a car, thereby opening up your options.

Normally, unemployment benefits are fully taxable at the federal level. So the fact that you may be getting a break on $10,200 of benefits is an opportunity you should embrace. Keep an eye out for your unemployment tax refund and do your best to use that money in a way that gives you the most benefit -- especially if your personal finances have not yet recovered from the impact of the pandemic.

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