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STORY BY JEANNE SAHADI, CNN BUSINESS

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Published on March 16, 2021 11:35 PM

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The new stimulus plan could affect your 2020 taxes. Here's how
As welcome as the American Rescue Plan is for many people, the fact that it was signed into law in the middle of tax filing season raises a number of questions.

That's because some provisions may affect how you should prepare your 2020 tax return, including calculating the size of your refund. And nearly 56 million people have already filed as of March 5. Here's what we know so far.

Tax free unemployment benefits

The main provision in the latest Covid relief package that affects 2020 taxable income applies to those who received unemployment compensation last year.

The American Rescue Plan retroactively excludes the first $10,200 in benefits from federal income tax for households with incomes below $150,000 a year.

That change will either decrease how much you owe the IRS or increase your refund, with the latter being most likely.

At H&R Block, for instance, "90% of our clients who are filing with unemployment compensation are getting a refund," said Kathy Pickering, the firm's chief tax officer.

Your federal refund may grow larger not only because the initial $10,200 in benefits is now tax free. The provision will reduce your adjusted gross income and taxable income, and that may make you newly eligible for some tax credits that require your income to be below a certain threshold, Pickering said.

The provision may also affect your state income tax return, too, if you live in a state with an income tax. That's because states will often base their computation of taxable income using either your federal adjusted gross income or taxable income.

"Your starting point will be reduced by the [unemployment compensation] exclusion," Pickering said. The IRS has issued this guidance sheet to explain how the change should be calculated and reported on your 2020 tax return. And it has said it also will provide an update for tax preparation software providers that will let filers incorporate the unemployment compensation change into their 2020 calculations.

For those who have already filed their 2020 tax returns, sit tight. "They should not file an amended return at this time, until the IRS issues additional guidance," the agency said.