IRS sends 430,000 additional tax refunds over unemployment benefits

The Internal Revenue Service this week sent 430,000 tax refunds — averaging about $1,189 — to filers who paid too much in taxes for their 2020 unemployment benefits.

This is the latest round of refunds related to the added tax exemption for the first $10,200 of unemployment benefits. The refunds totaled more than $510 million.

"The review of returns and processing corrections is nearly complete as the IRS already reviewed the simplest returns and is now concentrating on more complex returns," the agency said in a statement on Monday. "The IRS plans to issue another batch of corrections before the end of the year."

Under the $1.9 trillion American Rescue Plan, the first $10,200 in unemployment benefits aren't taxed for eligible filers. Because the legislation was signed into law halfway through the tax season this year, some taxpayers had already filed their federal returns without taking advantage of the break.

The agency identified 16 million taxpayers who may be eligible for an adjustment. For this round of refunds, the agency reviewed 519,000 returns and approximately 430,000 were eligible for a refund. The agency has so far issued more than 11.7 million refunds related to unemployment benefits, totaling over $14.4 billion.

Eligible filers whose tax returns have been processed will receive two refunds: The first reflects how they filed, and the second refund will reflect any tax break they get on their unemployment benefits. The IRS will issue refunds by direct deposit for taxpayers with valid banking information on their 2020 return. If that information is not available, a paper check will be sent instead.

The refunds are subject to normal offset rules, including past-due federal tax, state income tax, and state unemployment compensation debts, among others. If the refund is used to pay unpaid debt, the IRS will send a separate notice.

Both regular unemployment benefits and the jobless benefits provided by the stimulus legislation are subject to income tax. But the newly added tax exemption is for the first $10,200 of unemployment benefits; any benefits above that threshold are taxable. The break applies to the 2020 tax year and for households making up to $150,000.

Taxpayers who become eligible for the Earned Income Tax Credit (EITC) after the unemployment benefits exclusion is calculated may have to file an amended return to claim new benefits, the IRS previously said. The agency will send notices in November and December to individuals who didn't claim the EITC or the Additional Child Tax Credit but may now be eligible for them.

Denitsa is a writer for Yahoo Finance and Cashay, a new personal finance website. Follow her on Twitter @denitsa_tsekova

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