Unemployment Compensation Exclusion

Unemployment Compensation Exclusion

On March 11, 2021, the American Rescue Plan was signed into law.  Included in this plan was a provision that exempted up to $10,200 of unemployment benefits for eligible taxpayers(a)

For those taxpayers who qualify for this unemployment exclusion, but filed prior to the enactment of the American Rescue Plan, the IRS has asked taxpayers not to file an amended return to claim this exclusion.  For taxpayers who already have filed and figured their tax based on the full amount of unemployment compensation, the IRS will determine the correct taxable amount of unemployment compensation and tax.  Any resulting overpayment of tax will be either refunded or applied to other outstanding tax owed.  The IRS has already begun sending out refunds and this will continue through the summer months. For those who are receiving a refund by direct deposit, the description ‘IRS Treas. 310 Tax Ref’ may appear in the memo.

The IRS is processing the recalculations in two phases. The first phase is for single, married filing separate, head of household and qualifying widower filers as well as taxpayers filing joint where only one taxpayer received unemployment compensation.  The second phase will include married filing joint returns where both taxpayers received unemployment compensation.

Per the IRS, ‘there is no need for taxpayers to file an amended return unless the calculations make the taxpayer newly eligible for any additional federal credits and deductions not already included on the original tax return.’

For example, the IRS can adjust returns for those taxpayers who claimed the Earned Income Tax Credit (EITC) and, because the exclusion changed the income level, may now be eligible for an increase in the EITC amount which may result in a larger refund. However, taxpayers would have to file an amended return if they did not originally claim the EITC or other credits but now are eligible because the exclusion changed their income

Taxpayers should also review their state tax returns.  For Ohio taxpayers, see our article “Ohio – Unemployment Compensation Exclusion

(a) Eligible taxpayers

If you file single, head of household, qualifying widower or married filing separate and your modified adjusted income is less than $150,000, you can exclude up to $10,200 in unemployment benefits

For are married filing joint and your combined modified adjusted gross income is less than $150,000, each taxpayer can exclude up to $10,200 of unemployment compensation.

Below are some helpful links on the IRS 2020 Unemployment Compensation Exclusion

Eligibility 

FAQs

Claiming the exclusion (before filing)

Amended Return (Form 1040-X)              

Colleen Minnich