The Internal Revenue Service (IRS) is making it easier for Americans to receive tax refunds on their unemployment benefits. But whether New York State and other states will follow suit still remains to be seen.

In a statement on March 31, the IRS said that it will begin sending $10,200 in tax refunds to American taxpayers who filed their taxes without claiming tax breaks on their unemployment benefits. The move means the affected taxpayers will not be required to amend their tax returns and wait until the amended returns are processed before receiving their refunds.

When President Joe Biden signed the $1.9 trillion American Rescue Plan into law on March 11, the bill included a provision that allowed taxpayers to waive up to $10,200 in unemployment benefits, per person, from their 2020 taxable income. The exclusion phases out for people who have $150,000 or more in taxable income.

For taxpayers who filed their taxes after March 11, the $10,200 was deducted and therefore not applicable to the latest IRS guidance. However, for those taxpayers who included the first $10,200 from unemployment benefits in their taxable income, the American Rescue Plan created some consternation.

Now, though, the IRS has clarified and said that taxpayers won’t need to amend their returns and will automatically receive the $10,200 tax refund they otherwise included in their taxable income.

The IRS said the refunds will begin in May and continue through the summer until all taxpayers are refunded.

However, there are still questions left to be answered.

While most state taxing authorities tend to follow IRS guidance, that doesn’t always happen. And as of this writing, 13 states are not excluding unemployment compensation, creating a potentially troublesome tax picture for individuals.

As of this writing, the 13 state holdouts are: Colorado, Georgia, Hawaii, Idaho, Kentucky, Massachusetts, Minnesota, Mississippi, North Carolina, New York, Rhode Island, South Carolina and West Virginia.

There are, however, signs that perhaps New York State will join forces with the IRS. In a statement on March 31, State Senator Jim Tedisco announced a bi-partisan bill to exclude $10,200 in unemployment benefits from tax treatment. While the bill hasn’t been signed into law as of this writing, it’s possible it could be enacted.

As always, Perlson LLP will keep a close eye on unemployment benefits treatment. If you have any questions about the IRS’ decision or how it could impact your tax situation, please contact a Perlson LLP professional at 516-541-0022.

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