Owed A Refund Of Taxes On Unemployment Income? Prepare To Navigate A Maze

By Terri Jo Neff

As if the last 17 months haven’t been complicated enough, the Arizona Department of Revenue announced Thursday that some taxpayers who received income in 2020 from the $12.5 billion paid out by the state for unemployment insurance benefits and pandemic unemployment assistance may be eligible for a tax refund.

The refund can be obtained by filing an Arizona Form 140X amended return. But that is where the simple part ends.

The possibility of a refund affects those Arizonans who received unemployment payments in 2020 and filed their state income tax return on or before March 11, 2021. That’s the date the American Rescue Plan Act of 2021 was signed by President Joe Biden, making up to $10,200 of unemployment benefits exempt from federal income taxes in 2020.

Gov. Doug Ducey later signed legislation which mirrored the federal exemption, meaning many Arizonans with 2020 unemployment income likely filed a state tax return under the old tax code.

ADOR could have created a computer program to identify the affected taxpayers who filed on or before March 11 and send them a notification. Instead, the burden is on Arizonans to navigate a maze of “if this, then that” instructions from ADOR in order to obtain a refund.

To start with, the Arizona Form 140X cannot be filed unless the taxpayer’s 2020 federal tax return has been amended first. The IRS is already doing that for some taxpayers and even sending an adjustment notice with a refund check. Everyone else is responsible for preparing and filing an amended federal return.

Either way, Arizonans eligible for a refund due to overpaying taxes on their 2020 unemployment benefits must wait for the IRS to confirm the federal return has been adjusted. And then they have to ask the IRS for a “transcript” after the amended federal return is processed.

Once that is done, a taxpayer can complete the Arizona Form 140X. However, it cannot be e-filed through ADOR’s website; it must be printed out and mailed in.

On the upside, Arizonans have four years to amend their state income tax return to claim a refund for overpayment of unemployment income. An amended 2020 return filed in 2022, however, could trigger the need for an amended return in 2021.

Most Arizona residents will be able to complete the Arizona Form 140X by following simplified instructions provided at https://azdor.gov. However, part-year residents and nonresidents must follow the full instructions for Form 140X.