Online tax preparers like TurboTax and H&R Block haven’t yet updated their software to account for a tax break on unemployment benefits some Americans received last year.
As a result, taxpayers who are eligible for the new break and typically file a return digitally should wait, experts said.
About 138 million individual tax returns last year were filed electronically — almost 98% of the total, according to IRS data as of mid-July.
$10,200 unemployment tax break
The American Rescue Plan Act of 2021, signed Thursday by President Joe Biden, waives federal tax on up to $10,200 of jobless benefits received last year, per person.
Taxpayers are eligible for the tax cut if their modified adjusted gross income was less than $150,000 in 2020.
The IRS issued guidance on Friday to taxpayers who file a paper return with instructions on how to claim the tax break. The agency also said it would work with firms to update current tax software.
It appears some are still tweaking their systems to account for the new rules.
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In some cases, they might not have to wait much longer — TurboTax expects to have updated its software by Thursday evening, according to spokeswoman Ashley McMahon.
“We’re working around the clock to make updates to TurboTax based on the recently enacted American Rescue Plan so our customers can file with confidence and get their maximum refund,” McMahon said.
TurboTax processed nearly 40 million tax returns last year.
Lisa Patterson, a spokeswoman for H&R Block, said Tuesday the company is awaiting additional 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 filing, didn’t return a request for comment. IRS Free File is available to taxpayers whose adjusted gross income is $72,000 or less.
Companies in the Free File Alliance include 1040NOW Corp., ezTaxReturn.com, FileYourTaxes, Free Tax Returns, Intuit (which owns TurboTax), OnLine Taxes, TaxACT, TaxHawk and TaxSlayer.
The IRS didn’t return a request for comment.
Wait to file
The $1.9 trillion Covid relief bill offered the unemployment tax break in the middle of filing season, which began Feb. 12 and runs to April 15. The IRS is expected to push the deadline to May 17.
About 40 million people received unemployment benefits last year, according to The Century Foundation. The average person got $14,000 in assistance.
“It’s always challenging in the middle of a tax season when you have a tax law change,” said Nina Olson, executive director and founder of the Center for Taxpayer Rights. “It’s challenging for the IRS to incorporate it, and it’s challenging for the software providers.”
About 53.9 million tax returns have been e-filed this year, according to IRS data through March 5. That’s almost 97% of all returns so far.
For those who haven’t yet filed and want to claim the unemployment tax break, it’s likely best for e-filers to wait until online preparers have tweaked their systems accordingly, Olson said.
That’s especially true since the IRS has already begun depositing $1,400 stimulus checks into bank accounts. At this point, rushing to file a tax return so one’s eligibility and check amount are based on 2020 income may not occur in time, Olson said. (Taxpayers will eventually get any money owed to them.)
“I think if you give the major software companies a week, they will have it programmed in, and it would be worth waiting to save yourself the confusion,” Olson said.
However, some smaller software providers may not make the change this tax season, which is a concern, she added.
After Hurricane Katrina, for example, some firms in the Free File network didn’t incorporate new tax benefits offered to people affected by the natural disaster, Olson said. And those provisions were passed before tax season began, not in the middle as with the American Rescue Plan, she added.
Taxpayers who already filed their taxes and are eligible for the unemployment tax break should not file an amended tax return, the agency said Friday. The IRS may be determining how to provide the benefit without such an action, experts said.