The American Rescue Plan (ARP), which President Joe Biden signed into law in March 2021, is multifaceted and includes several stages of payments to Americans. With the $1,400 stimulus checks still rolling out, the IRS is working on new automatic payments to a smaller group of individuals.
These automatic payments will be a refund of the taxes paid on up to $10,200 of unemployment benefits received in 2020. For couples who file taxes jointly and who both received unemployment compensation in 2020, this amount doubles to $20,400.
This refund is only for those who earned less than $150,000 in gross income in 2020. Also, this refund is only for those who’ve already filed their 2020 tax returns. If you haven’t filed your tax returns yet, you will deduct the $10,200 from your additional income on line 8 on Schedule 1 of your federal tax return.
Initially, taxpayers would have had to file an amended return to get their refund if they already filed their taxes, but the IRS announced last month that the refunds would be automatic.
Those who use popular tax software should see the software automatically apply the $10,200 deduction.
The IRS hasn’t set a precise date yet, but it announced the refunds would start in May.
The payments will come in two main phases. The first phase will be for individual tax filers, and the second phase will be for married couples who filed joint returns. According to CNBC, within those two phases will be additional smaller phases that will continue through the summer.
The IRS stresses that most people won’t have to take any extra steps to get their refund.
The IRS is issuing a refund on some unemployment income but not all of it. If you earned more than $10,200 in unemployment income in 2020, your refund will only be for the amount of taxes paid on the first $10,200.
For those who haven’t filed their taxes yet and will deduct the $10,200 when they file, they’ll still owe taxes on any amount over $10,200.
For example, if you earned $15,000 in unemployment compensation in 2020, you would deduct $10,200 and owe taxes on just $4,800.
When you get a sudden windfall, it can be tempting to take that cash out and splurge on something big. But the extra cash may be ideal for paying down debts, by starting with high-interest debts to see how much can be paid down.
Even at the lowest tax bracket, which is 10% of the first $9,875 in income, that would be up to a $987.50 refund. That lump sum could make a big dent in your credit card bills.
If you earned $10,200 in unemployment income in 2020, which gets you the full tax credit, you could be looking at a total refund of up to $1,026.50.
If you’ve paid off your debts, the next place you may want to consider stashing this extra cash in a savings account as an emergency fund. An emergency fund should cover three to six months of living expenses, and this extra cash will help you reach that goal.
Finally, if you’ve paid off all your debts and have a three- to six-month emergency fund, investing the money and letting it grow over the years is also a solid plan.