Federal Unemployment Exclusion May Result in Bigger California Tax Refunds

Federal Unemployment Exclusion May Result in Bigger California Tax Refunds

California taxpayers may get more money from the state because of the unemployment exclusion in the American Rescue Plan Act of 2021. California already does not tax unemployment compensation. But, the exclusion of some unemployment compensation from federal adjusted gross income (AGI) for 2020 may qualify taxpayers for increased California tax credits.

What is the federal unemployment exclusion?

The American Rescue Plan Act of 2021 excludes up to the following amounts of unemployment compensation from federal AGI for 2020:

• $10,200 for single taxpayers; and
• $20,400 for married taxpayers filing jointly/registered domestic partners.

The exclusion applies only if the taxpayer’s AGI for the tax year is less than $150,000.

The exclusion may affect a taxpayer’s state tax liability. This is because the amount of some California tax credits depend on a taxpayer’s federal AGI.

What California tax credit amounts might increase?

Taxpayers may qualify to receive more money from the state through the following incentives:

• the California earned income tax credit (CalEITC);
• the young child tax credit; and
• the Golden State Stimulus payment.

What should taxpayers do next?

Many taxpayers do not have to do anything to receive the additional tax benefits. A taxpayer’s next steps depend on:

• when the taxpayer filed or will file a California tax return for 2020;
• whether the taxpayer claimed the CalEITC; and
• the amount of the taxpayer’s federal AGI.

Already claimed the CalEITC?

Taxpayers who filed for 2020 reporting unemployment income and claiming the CalEITC do not need to do anything. California will make the required changes. Taxpayers who filed before March 11, 2021, will receive any related refunds beginning in August 2021. Other taxpayers will receive refunds pursuant to normal return and refund processing timeframes.

Did not claim the CalEITC?

Taxpayers who filed for 2020 reporting unemployment income and did not claim the California EITC should see if they qualify for the credit. Taxpayers who work and have low income may qualify. If they qualify, they do not need to amend their returns. They may simply complete Form 3514, California Earned Income Tax Credit, and mail the form to:

Franchise Tax Board

PIT Correspondence

PO Box 94240-0040

Sacramento, CA  94240-0040

Taxpayers who qualify for the CalEITC and have a child under the age of 6 may also qualify for the young child tax credit.

What about Golden State Stimulus payments?

Most taxpayers who qualify for the California EITC also qualify to receive a Golden State Stimulus payment. Most taxpayers who qualify for the stimulus payment do not need to do anything to receive it. California will issue the payments after it processes 2020 returns filed by eligible taxpayers.

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