The Internal Revenue Service is sending 2.8 million refunds this week to taxpayers who paid too much in taxes for their 2020 unemployment benefits.

"IRS efforts to correct unemployment compensation overpayments will help most affected taxpayers avoid filing an amended tax return," the agency said in a statement on Friday.

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Under the $1.9 trillion American Rescue Plan, the first $10,200 in unemployment benefits aren't taxed for eligible filers. Because the legislation was signed into law halfway through the tax season, some taxpayers had already filed their federal returns without taking advantage of the new tax break. 

The agency has so far identified 13 million taxpayers that may be eligible for adjustment. To date, the agency has reviewed 3.1 million of those returns, and more than 2.8 million were eligible for refunds.

Photo: Getty Creative

The review and the processing of the additional refund will continue during the summer with the next set of refunds expected to be issued in mid-June.

Filers whose tax returns have been processed will receive two tax refunds: the first reflects how they filed and the second refund will reflect any tax break they get on their unemployment benefits. The IRS will issue the refunds by direct deposit for taxpayers with valid banking information on their 2020 return. The agency will send a paper check if that information is not available.

The refunds will be subject to normal offset rules, including past-due federal tax, state income tax, state unemployment compensation debts, among others. If the refund is used to pay unpaid debt, the IRS will send a separate notice.

(Photo: Getty Creative)

The first phase of the adjustment is made for single filers with simpler tax returns, such as those that didn't claim dependents or any refundable tax credits. The next phase will review more complex returns, which may take "through the end of summer" to correct, the agency previously said.

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Taxpayers that become eligible for the Earned Income Tax Credit (EITC) after the unemployment benefits exclusion is calculated may have to file an amended return to claim new benefits, the IRS said.

Both regular unemployment benefits and the jobless benefits provided by the stimulus legislation are subject to income tax. But the newly added tax exemption is for the first $10,200 of unemployment benefits; any benefits above that threshold are taxable. The break applies to the 2020 tax year and for households making up to $150,000.

The break would increase a taxpayer's refund by about $1,000 or reduce their tax liability by the same amount, according to previous estimates from Andrew Stettner, an unemployment insurance expert and senior fellow at the Century Foundation.

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Denitsa is a writer for Yahoo Finance and Cashay, a new personal finance website. Follow her on Twitter @denitsa_tsekova

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  • Many taxpayers are still waiting to get last year’s tax refund

  • America has 'two completely different systems' when supporting unemployed workers

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