IRS issues guidance on unemployment benefits exclusion

What: The American Rescue Plan Act of 2021 provided for an exclusion of up to $10,200 for unemployment benefits paid to taxpayers in 2020. Normally, unemployment benefits are fully taxable and the exclusion is only available to taxpayers with modified adjusted gross incomes of less than $150,000. However, since the American Rescue Plan was enacted on March 11, 2021, about a month after the filing season for 2020 tax returns had commenced, millions of taxpayers had already filed their 2020 tax returns. Given these circumstances, the IRS has now issued guidance addressing both what taxpayers who have already filed should do to report their unemployment benefits and how taxpayers who have yet to file their tax return should report the exclusion.

Why: Issuing this guidance should help alleviate the need for the millions of taxpayers who have already filed their 2020 tax returns to file amended returns to claim their unemployment benefits exclusion. The IRS has also provided specific instructions on how taxpayers who have yet to file their 2020 tax returns should report unemployment compensation on those returns through revisions to Form 1040 Schedule 1 instructions.

For taxpayers who have yet to file tax returns for 2020:

• Taxpayers should report the total unemployment compensation paid to them and reported on Form 1099-G Box 1 on Line 7 of Form 1040 Schedule 1, unreduced by any unemployment exclusion
• If the amount reported on Form 1099-G is incorrect, the taxpayer is to report only the actual amount of unemployment compensation paid to them in 2020
• If the taxpayer’s modified adjusted gross income is less than $150,000, the taxpayer may exclude up to $10,200 (or up to $10,200 each for spouses filing jointly), reported as a negative amount on Line 8 of Form 1040 Schedule 1
• The Schedule 1 instructions include an Unemployment Compensation Exclusion Worksheet to calculate modified adjusted gross income, the amount to exclude, where to report it on the tax return, and explanatory information to include
• The unemployment compensation received is not included in determining modified adjusted gross income for purposes of determining if the $150,000 level has been reached
• Some states may not recognize the unemployment compensation exclusion for their state income tax 

For taxpayers who have already filed tax returns for 2020:

• The IRS asks those taxpayers not to file an amended tax return to claim the exclusion
• The IRS states that it will refigure the taxes of those taxpayers using the excluded unemployment compensation amount, adjust the account accordingly, and send any refund amount directly to the taxpayer
• The IRS does not state when taxpayers should expect to receive those refunds

Who: Tax expert Mark Luscombe, JD, LL.M, CPA, Principal Federal Tax Analyst at Wolters Kluwer Tax & Accounting, can help discuss the various tax guidance with respect to reporting the unemployment compensation exclusion.

Contact: To arrange interviews with Mark Luscombe and other federal and state tax experts from Wolters Kluwer Tax & Accounting on this or any other tax-related topics, please contact Bart Lipinski.