Some Jobless Workers Should Amend Their Tax Returns After Unemployment Tax Break

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

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Tax forms with calculator and pen on wooden surface.

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Though the IRS will adjust already-filed tax returns to account for the new unemployment tax break, some filers may want to amend their returns anyway.

The $1.9 trillion American Rescue Plan came with a host of provisions to provide aid for the public during the pandemic, including a round of $1,400 stimulus checks. The relief package also did a few good things for workers on unemployment. Not only did it boost jobless benefits by $300 a week through early September, but it also allowed for $10,200 of unemployment income to be collected tax free.

Normally, unemployment benefits are taxable at the federal level. But this year, a number of Americans may be entitled to a tax refund on their 2020 returns due to the recent change.

However, the American Rescue Plan was signed into law after the IRS opened the 2021 tax season, so many people filed their taxes before learning about the tax break. The good news is that these filers don't have to submit an amended tax return -- the IRS will adjust returns accordingly so those entitled to that tax break get it. But some filers in this situation may want to amend their returns nevertheless.

Why it could pay to amend last year's tax return

Amending a tax return is yet another step that many people would rather not spend time on. But if you're entitled to a break on $10,200 of unemployment income from 2020, it could pay to amend last year's taxes -- even though the IRS can adjust your return for you.

The reason? Depending on your 2020 wages, not counting $10,200 of unemployment income toward last year's earnings could bump you into a category where you're eligible for certain lucrative tax breaks that the IRS won't give you automatically.

For example, the Earned Income Tax Credit (EITC) is available to low-wage filers. If you're married with three or more children, you can qualify for the EITC on your 2020 tax return if your income doesn't exceed $56,844. (The maximum for those filing as single is $50,594.)

Now, say you earned $50,000 through your job before getting laid off, and then you earned another $10,200 in unemployment benefits. Your total income -- $60,200 -- would normally put you over the limit for the EITC. But now that your $10,200 in unemployment benefits doesn't count as income for tax purposes, you're below the $56,844 threshold -- in which case it would pay to claim the EITC on your taxes.

The point? If you filed your 2020 return before accounting for a tax break on your first $10,200 of unemployment income, it could be worth amending that return. And if you're not sure what to do, speak to a tax professional. You might pay a modest fee to have someone review your return and advise you on what to do, but the payoff could be more than worth it. The EITC, for example, is worth up to $6,660 for the 2020 tax year if you have three or more children. So spending, say, $200 to work with a tax professional to get your return amended would still leave you with a nice profit.

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