Taxing Questions by David Zubler
The recently signed American Rescue Plan provides an exemption of $10,000 in 2020 for people who received unemployment insurance benefits.
Almost 40 million people received unemployment insurance benefits and the average person received about $14,000 in benefits.
If your modified adjusted gross income (AGI) is less than $150,000, the American Rescue Plan 2021 excludes from income up to $10,200 of unemployment compensation paid in 2020. This means you don’t have to pay tax on unemployment compensation of up to $10,200.
If you are married, each spouse receiving unemployment compensation doesn’t have to pay tax on unemployment compensation of up to $10,200; however, amounts over $10,200 for each person are still taxable.
If your modified AGI is $150,000 or more, you can’t exclude any unemployment compensation.
The unemployment compensation and the exclusion should be reported separately on your tax return.
You should receive a Form 1099-G showing in box 1 the total unemployment compensation paid to you in 2020. If you received an overpayment of unemployment compensation in 2020 and you repaid any of it in 2020, you will need to subtract the amount you repaid from the total you received. Also enter “Repaid” and the amount you repaid on the dotted line next to line 7.
Enter the full amount of your unemployment compensation on Schedule 1, line 7 of your tax return. Enter your exclusion on Schedule 1, line 8.
The initial guidance said that taxpayers would count unemployment benefits as part of their 2020 income when determining if they qualify for the tax break; however, the rules changed so that workers can exclude jobless benefits from their calculation of modified adjusted gross income.
You can use the Unemployment Compensation Exclusion Worksheet to figure your modified AGI if you are not sure if you qualify due to the amount of your AGI.
If you have already filed your 2020 Form 1040 or 1040-SR, you should not file an amended return at this time. The IRS will issue additional guidance as soon as possible.
States that count unemployment benefits as taxable income may use the federal guidelines. Alabama, California, Montana, New Jersey, Pennsylvania, and Virginia are currently completely exempting it.
David Zubler is a tax accountant in East Tennessee, author of four tax books, and a philanthropist. Proceeds from the books go to a charitable foundation he created for underprivileged children. He is founder of Your Tax Care, which provides tax education and rescues people with IRS problems. David can be reached for questions and consultation at yourtaxcare.com.