Unemployment Tax Refunds: What Americans Need to Know

You might still have some extra cash coming your way from the IRS.

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Key points

• The American Rescue Plan exempted up to $10,200 of 2020 unemployment income from taxes.
• Many Americans filed their most recent tax returns before accounting for that change, and are now waiting on a refund as a result.

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Millions of Americans lost their jobs in 2020 and relied on unemployment benefits to stay afloat. In March 2021, those on unemployment were thrown an extra bone thanks to the passing of the American Rescue Plan. Not only did that relief package, which also sent stimulus checks into Americans' bank accounts, boost unemployment, but it exempted up to $10,200 of 2020 unemployment income from taxes.

Normally, jobless benefits are taxable, and those collecting them can opt to have taxes withheld up front or pay the IRS upon submitting their tax returns. Because many people had filed their 2020 taxes by the time the American Rescue Plan became official, they'd missed out on the chance to claim a refund for already-taxed unemployment income. Many people in that situation qualified for a refund.

So far, the IRS has sent out over 11.7 million refunds totaling $14.4 billion related to unemployment benefits. But there are still many tax filers who are due a refund. And the longer they have to wait, the more they might struggle.

A pressing need for money

A lot of people who were on unemployment last year actually saw their income go up. That's because those benefits got a generous boost that, in many cases, paid jobless workers more than their former employers.

But still, many people who lost their jobs during the pandemic struggled in the absence of their regular paychecks. Having to wait on a refund for unemployment benefit taxes could be putting those people in a tough spot.

Unfortunately, the IRS is grappling with a major backlog of tax returns. Last year, the agency closed the bulk of its offices in response to the pandemic, which meant it fell behind on processing paper tax returns, which are done manually by IRS employees. Those closures have created a scenario where the IRS is still, to this day, lagging on tax return processing.

Normally, the IRS is able to issue refunds for electronically filed tax returns within 21 days of receipt. Paper tax returns can easily have double the turnaround time. But now, the IRS is taking up to 120 days to issue some refunds, leaving filers in a desperate spot.

These days, inflation is causing the cost of everyday goods to rise exponentially. Consumers are being forced to pay more at the pump and to fill up their grocery carts with enough food to feed their families. Having to wait on tax refunds related to unemployment benefits is a blow many Americans just can't afford right now.

The money should come eventually

The good news is that the IRS has plans to send out another batch of unemployment-related refunds by the end of the year. Those who are still waiting on that money may not have to hold out all that much longer.

Meanwhile, so far, there's no indication that unemployment benefits received in 2021 will qualify for a tax break. The jobless crisis was far worse in 2020 than it's been this year, so lawmakers may opt to limit that benefit to 2020 only.