Whether you were a senior manager, staff, or stakeholder in business last year, chances are you were out of work (even if only temporarily) and collecting unemployment. You were not alone.
More than 23 million USA workers filed for unemployment in 2020. For the first time, some self-employed workers also qualified for unemployment benefits. The COVID relief package, which President Biden signed into law this month, brings welcome news to many of them.
The American Rescue Plan Act allowed taxpayers with modified adjusted gross income of less than $150,000 to exclude unemployment compensation up to $20,400 if married filing jointly and both spouses received unemployment benefits. For all others, $10,200, but only for 2020 unemployment benefits. You should consider any unemployment benefits you receive in 2021 as fully taxable.
Beginning in May and continuing thru the summer, the IRS will automatically issue refunds to eligible taxpayers who already filed a federal tax return reporting unemployment compensation before the recent changes made by the American Rescue Plan Act. Under this process, most eligible taxpayers will not have to file amended returns to receive a federal tax refund.
Because the change occurred after some people filed their 2020 tax returns, the IRS says it will take steps in the spring and summer to correct those returns, which may result in a refund. The IRS promised to attempt to issue these refunds without requiring taxpayers to file amended income tax returns, which can be costly and time-consuming.
The IRS explained that for those taxpayers who already have filed and figured their tax based on the full amount of unemployment compensation, it will determine the correct tax amount of unemployment compensation and tax generally. Any resulting overpayment of tax will be either refunded, or applied to outstanding taxes owed.
The IRS will do these recalculations in two phases, starting with those taxpayers eligible for the $10,200 exclusion and then moving on to returns for those married filing jointly taxpayers who are eligible for the $20,400 exclusion and others with more complex returns. Taxpayers do not need to file amended returns unless the calculations make the taxpayers newly eligible for additional federal credits and deductions not already included on the original tax returns, for example, if the EITC is involved.
If your modified AGI is $150,000 or more, you can’t exclude any unemployment compensation. If you file Form 1040-NR, you can’t exclude any unemployment compensation for your spouse.
For those taxpayers who have not yet filed their returns the IRS has published guidance and a worksheet for figuring modified adjusted gross income for these purposes and the amount of unemployment compensation a taxpayer can exclude from income. When you claim unemployment insurance, you must also complete a Schedule 1 with your 1040 to report this additional income. Under the new exemption, you should report the total amount of unemployment compensation you received on line 7 of Schedule 1. Then, use the Unemployment Compensation Exclusion Worksheet to determine the exclusion amount you’re eligible for, which you’ll report on line 8 of Schedule 1.
The IRS advises taxpayers to review their state tax returns, too. Some states like are requiring workers who received a federal tax break on unemployment benefits to file an amended tax return to get their refund. This largely applies to taxpayers who’d filed a federal and state tax return before the American Rescue Plan became law.
Reach Out To Us: This is good news for many clients! We can help if you have questions regarding the new IRS guidance. We advise our Northern clients that New York is one of 12 states not offering the unemployment tax break. Taxpayers in NY who filed a tax return after the American Rescue Plan passed may have mistakenly excluded unemployment benefits from their state tax return as well as their federal return. Such taxpayers should have added back unemployment benefits to income on their state tax returns. New York State is telling taxpayers to file an amended state tax return to accurately reflect income. Contact us toll free at 855-542-7537 for assistance or email CPA@Fuoco.com.
