2020 was rough year for many workers in our economy. It was especially difficult for those in select industries, such as leisure and travel. With the implementation of "stay at home" or "lockdown" orders, many Americans turned to pandemic unemployment assistance to help stay afloat.
Taxes On Unemployment
Almost all income has tax implications. This is no different when it comes to unemployment. The federal government recognizes unemployment compensation as taxable income to the recipient. As such, recipients had the option to have an optional 10% withheld from their assistance to help with the tax bill that was coming down the pike. This 10% was put towards the recipient's federal tax bill.
Congress Steps In To Help
In March, after tax season was well underway and tax preparers were basically waist deep in paperwork, Congress passed the American Rescue Plan on March 11th, 2021. This law provided an exclusion of up to $10,200 for each individual that received unemployment benefits. This meant real tax savings for individuals and families in need. Basically, if you received under $10,200 in unemployment assistance, you didn't owe any taxes on that help. If you received over that amount, let's say $15,000, you could exclude the first $10,200. This would bring the taxable portion of unemployment to only $4,800 for Federal purposes.
So what if you had already filed?
While this law provided needed help, it left taxpayers and tax preparers in limbo. What were you supposed to do if you already filed before this new legislation? Were you just out-of-luck? Nope. The IRS issued guidance on their website stating that
"If you have already filed your 2020 Form 1040 or 1040-SR, you should not file an amended return. The IRS will automatically refund money to people who already filed their tax return reporting unemployment compensation. See IR-21-71 for more details."
This was a nice gesture and helped to make the lives of taxpayers and preparers easier all around by saving the time and expense of filing an amended federal return. There's a good chance that if you're reading this it’s because you've recently received that refund from Uncle Sam and want to know what to do next. The IRS guidance was specifically for federal income taxes not state income taxes, leaving an unanswered question in many peoples minds.
"I live in Ohio. Can I get a refund for state taxes?"
This question was in the minds of many of us tax preparers as well, and it was unclear how we should proceed. Should we file an amended return? Should we wait and see if the state would just send a check like the federal government? Finally, we got the answer: File the amended state return! This means that, while yes it will be an extra form, you can request a refund for taxes paid on some of those unemployment benefits at the State level in Ohio.
How Ohio Income Taxes Work and Why It Matters
According to the 2020 Ohio Form IT 1040 (Individual Income Tax Return), the starting point for calculating Ohio income taxes is the "Federal Adjusted Gross Income". This number comes from your federal tax return on IRS Form 1040 (U.S. Individual Income Tax Return), line 11. The preceding line of this federal tax form, (Line 10c), is called "total adjustments to income". This is where the $10,200 exclusion of unemployment benefits would have been included if you had been able to claim it when you filed your federal return. So your federal Adjusted Gross Income (AGI) would have been lower and this lower number would have been the starting point for calculating your Ohio state income tax. By amending your state return, you are letting Ohio know that this number has in fact decreased and you shouldn't have paid as much in taxes as you originally thought you owed. This produces an extra refund for you if you're eligible.
The 3 Key Steps to Filing Your Amendment
According to the Ohio Department of Taxation you must follow these 3 steps in order to claim a refund for your taxes paid on unemployment benefits in Ohio.
1. File an amended Ohio IT 1040 (and an amended SD 100 for those who reside in a traditional tax base school district) to report your new federal adjusted gross income (AGI);
2. Include a copy of your IRS Tax Account Transcript showing your new federal AGI, which are available at irs.gov/individuals/get-transcript or by calling 800-908-9946; AND
3. Complete the Ohio Reasons and Explanation of Corrections (Ohio form IT RE or SD RE).
Step 1 is pretty self explanatory, though could be a bit tricky based on your situation. Amend the return! Step 2 is how you prove to the state that you, in fact did, get a refund of your federal taxes paid on unemployment benefits. This transcript will show all the account activity for your federal tax account. It will show withholding from your W-2 income and other payments/refunds on the account. When you complete step 3, you need to check the box which says “Federal adjusted gross income decreased” and input “Federal unemployment deduction refund” in the “Detailed explanation” section of the form. This step is clarifying that the reason you are amended the return and claiming a refund is because your Federal Adjusted Gross Income (AGI) is lower than before meaning you likely have a smaller number to be taxed on now.
"How much could I get back?"
This is a very common question, and the answer varies substantially by person. For many taxpayers this refund can range from very small (or even nothing) to hundreds of dollars. It all depends on how much unemployment assistance you and/or your spouse received, what your total income was, and your state income tax rate. If you and your spouse both received $12,000 each in unemployment benefits because neither of you could find work, you will likely receive back more than a single person who only received, and paid taxes on, $2,000 in benefits because they found a new job quickly.
When should you file?
The sooner the better! If you are owed money, why wait to collect? With this crazy year, it may take longer than usual to process an amended return. Getting your amendment in sooner rather than later may mean money back in your pocket faster. If you don't want to do it yourself, feel free to reach out to the person who prepared your 2020 return. If you did it yourself and want to avoid the headaches of amending a return all on your own contact a competent tax preparer. We happen to know some here.
Disclaimer: This article is educational content and not intended to be used as financial, legal, or tax advice or to replace such advice. The views expressed here are not necessarily the views of Everett Consulting Services, LLC. Please seek out and receive services from a qualified professional before making any financial decisions.