How to Get the Tax Break on Unemployment Benefits

The coronavirus pandemic completely changed our way of life.

Millions of people lost their jobs and had to rely on unemployment benefits for the first time, for example. In the past, those checks were taxed at the federal level, but now that's changed, to a degree.

"If you got $20,000, you can exclude $10,200 of it," said Ena Askia-Reese, a Liberty Tax franchisee and enrolled agent who can represent people in negotiations with the IRS. "If you got less than $10,000 in unemployment, you wouldn't have to count it at all."

The newest coronavirus relief bill includes a provision that exempts the first $10,200 of unemployment benefits from taxes. California does not require people to pay taxes on their unemployment benefits, but the IRS does. Because tax season started in February, many people have already filed their taxes.

"The IRS has not spoken on how they want us to remove the $10,000 from the returns," Askia-Reese said. "We're waiting until they pass down the new language and then our software developers will put that in, and we'll make the adjustment. We'll have a lot of amendments this year."

Askia-Reese has been preparing taxes for three decades. If people have questions this year, she recommends waiting to file and checking with a tax preparer. She knows many of her clients will need their tax returns changed this year, she said.

"The amendments are for the people who have already filed," Askia-Reese said. "We're going to have to go in and make the adjustment. They'll be happy because they should get a bigger refund or owe a little less."

However, filing an amendment is not a quick process and the IRS is still backlogged from pandemic-related issues. That's why Askia-Reese says people need to be patient.

"It's been the longest year already," said Askia-Reese. "Typically when there are major changes to the tax code, you find out in November or December. But this year, in the middle of the season, a lot of things are being changed."

Askia-Reese said she thinks the tax deadline might be moved back again because of the late changes. She also warns people to not be surprised if their tax refund is smaller than before.

"A lot of the smaller refunds do stem from having the additional non-earned income," Askia-Reese said. "That sticker shock of having a smaller refund is not something that your preparer is doing in error. It really is because of all the tax changes and pandemic pay."

Taxpayers who don't have extra tax forms should go to IRS.gov and use the Free File system, which allows people to file their federal taxes completely free of charge.

"But if you have anything like dependent children, children of divorce, separated parents, things that you have questions on, see a preparer," Askia-Reese said. "The cost of seeing a preparer is significantly less than the cost of making a mistake."