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Online tax preparers like TurboTax and H&R Block have not yet updated their software to offset the reduction in taxes on unemployment benefits that some Americans received last year.
As a result, taxpayers who are eligible for the new break and typically file a statement digitally should wait, experts said.
About 138 million individual tax returns last year were completed electronically – almost 98% of the total, according to IRS data in mid-July.
$ 10,200 reduction in unemployment tax
The American Rescue Plan Act of 2021, signed Thursday by President Joe Biden, exempts federal taxes of up to $ 10,200 from unemployment benefits received last year, per person.
Taxpayers are eligible for the tax cut if their modified adjusted gross income is less than $ 150,000 in 2020.
The IRS issued guidelines on Friday to taxpayers who submit a paper statement with instructions on how to claim the tax reduction. The agency also said it would work with companies to update current tax software.
It seems that some are still adjusting their systems to account for the new rules.
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In some cases, they may not have to wait much longer – TurboTax expects to update its software on Thursday night, according to spokeswoman Ashley McMahon.
“We are working around the clock to make updates to TurboTax based on the recently enacted American Redemption Plan, so that our customers can confidently register and get their maximum refund,” said McMahon.
TurboTax processed nearly 40 million tax returns last year.
Lisa Patterson, a spokeswoman for H&R Block, said on Tuesday that the company is awaiting further guidance from the IRS on how the unemployment exclusion will be implemented.
The Free File Alliance, a group of nine firms that partner with the IRS to offer free electronic tax returns, did not return a request for comment. The IRS Free File is available to taxpayers whose adjusted gross income is $ 72,000 or less.
Free File Alliance companies include 1040NOW Corp., ezTaxReturn.com, FileYourTaxes, Free Tax Returns, Intuit (which has TurboTax), OnLine Taxes, TaxACT, TaxHawk and TaxSlayer.
The IRS did not return a request for comment.
Wait to archive
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Covid’s $ 1.9 trillion relief bill offered a reduction in the unemployment tax in the middle of the filing season, which began on February 12 and runs through April 15.
About 40 million people received unemployment insurance last year, according to The Century Foundation. The average person received $ 14,000 in assistance.
“It is always a challenge in the middle of a tax season, when there is a change in tax legislation,” said Nina Olson, executive director and founder of the Center for Taxpayer Rights. “It is a challenge for the IRS to incorporate it and it is a challenge for software vendors.”
About 53.9 million tax returns were emailed this year, according to IRS data as of March 5. This represents almost 97% of all statements so far.
For those who have not yet filed the lawsuit and want to ask for a reduction in the unemployment tax, it is probably best for e-filers to wait until online preparers have adjusted their systems accordingly, said Olson.
This is especially true because the IRS has already started depositing $ 1,400 stimulus checks into bank accounts. At that point, rushing to file an income tax return so that the eligibility and amount of the check are based on the 2020 income may not occur in time, Olson said. (Taxpayers will eventually receive all the money owed to them.)
“I think if you give big software companies a week, they’ll have it scheduled, and it would be worth the wait to avoid confusion,” said Olson.
However, some smaller software providers may not make the switch this tax season, which is a concern, she added.
After Hurricane Katrina, for example, some Free File companies did not incorporate new tax benefits offered to people affected by the natural disaster, Olson said. And those provisions were passed before the tax season began, not in the middle as in the American Rescue Plan, she added.
Taxpayers who have already declared their taxes and are eligible for the unemployment tax reduction should not file an amended tax return, the agency said on Friday. The IRS can determine how to provide the benefit without such an action, experts say.