States Still Spinning from Tax Season Curveballs

As tax deadlines near, many taxpayers are still awaiting state guidance on how to handle a flurry of last-minute changes this tax season, and states are still grappling with curveballs—from extended deadlines to late unemployment benefits exclusions.

After a later-than-usual start to the tax season, the IRS in March extended its deadline by about a month to May 17, giving individuals more time to file their returns and contribute to savings plans. The change came after President Joe Biden’s American Rescue Plan had already passed, a month into tax season and after millions of Americans had already filed, offering relief for taxpayers who received unemployment compensation in 2020. If their adjusted gross income was less than $150,000, they could exclude up to $10,200 of unemployment compensation from their taxable income.

Amid the changes, the IRS scrambled to issue guidance and a new worksheet for those who had not already filed and worked with tax preparers to update their software to account for the change. The IRS also followed up with early filers, telling them to sit tight while it recalculated their taxes and issued automatic refunds—starting in May—to those taxpayers who overpaid. 

But while the IRS has tackled all of these adjustments, the curveballs left states to make their own rules.

Most states followed the lead of the IRS and extended their filing deadlines in some fashion, although Hawaii and New Hampshire did not. Other states that were hit with severe winter storms also delayed due dates to provide relief to taxpayers.

The unemployment benefits exclusion has proven more difficult for states, as it applies only at the federal level, forcing each state to decide if it will follow suit. Every state taxes unemployment differently. Some tax all jobless benefits, while others only partially tax unemployment compensation. 

Even so, there has been  “no word” on how states will handle it. Either states will make an automatic adjustment and send out refunds, or require early filers to amend returns if the state makes a change to how it accounts for jobless benefits, said Mark Steber, chief tax information officer at tax preparation firm Jackson Hewitt, in an email. Some states aren’t even ready to take filings yet, with the tax deadline fast approaching, according to Steber. 

“You must check with your local state,” Steber said. “And many are out of legislative session to pass new laws ... If someone decides to self-prep, they could lose out on a major tax deduction or not include something on their return and get into trouble."