IRS to Adjust Taxes on Unemployment Compensation

The IRS announced yesterday that they will automatically re-adjust tax returns that were filed reporting unemployment income before changes took effect due to the American Rescue Plan Act (ARPA). For taxpayers who have already filed and figured their tax based on the full amount (prior to Unemployment Compensation Exclusion), the IRS will determine the correct taxable amount of unemployment compensation and tax. Any resulting overpayment of tax will be either refunded or applied to other outstanding taxes owed.

Taxpayers do not need to file an amended return unless the calculations or adjustment make taxpayers newly eligible for additional federal credits and deductions not already included on the original tax return. As the Unemployment Compensation Exclusion calculation directly affects your adjusted gross income (AGI), taxpayers may be eligible for income-limited credits. The IRS will not calculate these credits.

Taxpayers should be aware that the state may not necessarily conform to the American Rescue Plan Act. Check the State Conformity to the 2020 Unemployment Compensation Exclusion to see if your state adopts or dissociates with the exclusion. Conforming states may not automatically re-adjust filed tax returns as the IRS does. Therefore, it is recommended to check with your states to see if filing a state amended return is necessary.