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As the US Internal Revenue Service is struggling to cope with the backlog of tax returns, thousands of taxpayers may still be waiting for tax refunds for unemployment benefits received during the Covid pandemic.
The American Relief Program Act is a pandemic relief law that exempts federal taxes on unemployment benefits of up to $10,200 received in 2020. The unemployment rate this year has risen to any time since the Great Depression.
However, many people who are eligible for tax relief have already filed their annual tax returns before President Joe Biden signed the legislation on March 11.
This means that they overpaid the federal tax bill and may be eligible for a refund. (In other cases, overpayment applies to unpaid taxes and debts.)
To date, the IRS has identified more than 16 million people who may be eligible for tax relief. According to the latest data, the agency has sent more than 11.7 million refunds worth US$14.4 billion.
Payments will begin in May; the IRS has stated that they will continue into summer and fall. It is not clear how many people are waiting. (Not everyone identified as a potential candidate by the IRS is necessarily eligible.)
The Internal Revenue Service plans to issue another batch of refunds before the end of the year. The agency sent about 430,000 refunds in the last batch of refunds issued around November 1, totaling more than US$510 million. The average refund is approximately US$1,189.
A spokesperson for the IRS did not specify how much or when the agency will issue.
Delays have largely affected taxpayers with complex returns. For example, they might include a married couple, each of whom received benefits in 2020.
The tax calculation of a couple may be more complicated than that of a single taxpayer. Each spouse has the right to deduct up to $10,200 in benefits from federal taxes. But this does not mean that the couple, as a tax unit, can always enjoy double tax deductions (US$20,400).
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Suppose one spouse received $5,000 in unemployment benefits in 2020, and the other received $25,000. The couple will deduct $15,200 in benefits from the tax (instead of the entire $20,400). This is because the spouse of the latter can only exclude up to $10,200 in benefits.
“Since the IRS has reviewed the simplest returns and is now focusing on more complex returns, the review and processing corrections on returns are almost complete,” according to an agency statement in November.
Not all taxpayers are eligible for unemployment tax relief. For example, if their revised adjusted gross income (excluding unemployment compensation) is $150,000 or more, they are not eligible.
Congress has not passed legislation to provide tax relief for benefits collected in 2021.
The Internal Revenue Service is dealing with a backlog of individual tax returns. As of December 4, the bureau had 6.7 million outstanding personal tax returns.
The IRS has had a busy year (for example, implementing new rules around monthly payments for stimulus checks, unemployment compensation, and enhanced child tax credits) after the pandemic disrupted its face-to-face business. It has also been dealing with the high incidence of identity fraud.
Most unprocessed returns include returns that have errors or require “special handling” by IRS staff. In these cases, the IRS requires a longer time than the typical 21-day time frame to issue the relevant refund, and in some cases it will be extended to between 90 and 120 days.
On May 1 this year, the number of returns requiring special handling hit a record high of 9.8 million; by December 4, the agency had reduced it to 61,000.
“We are working hard to resolve the backlog,” the agency said. “Please do not submit a second tax return or contact the IRS to find out the status of your return.”
The IRS website provides answers to some common questions about tax refunds.
Most taxpayers will automatically receive unemployment refunds through direct deposit or paper checks. They do not need to submit revised tax returns.
However, there are some exceptions.
For example, deducting unemployment compensation of up to $10,200 from a person’s income may qualify some taxpayers for tax credits or deductions that they did not claim on the original return. In this case, taxpayers need to submit a revised tax return before they can apply for new credits or deductions.
(However, this is not true for all credits and deductions, such as reinstatement rebate credits, premium tax credits, or income tax credits without eligible children; in these cases, the IRS will automatically calculate and send the payment. State The tax bureau also sends notices to some taxpayers who may now be eligible for the child tax credit; taxpayers who respond to the notice do not have to submit a revised return.)
Taxpayers can consult this IRS website to learn about issues related to unemployment tax relief.
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