 | By Nicole DeRosa, CPA, MAcc, Senior Tax Manager |
Last week, the $1.9 trillion American Rescue Plan Act of 2021 signed into law by President Biden included a very welcome retroactive tax provision for unemployed workers. The bill provides that up to the first $10,200 of unemployment compensation benefits, paid to you in 2020, can now be excluded from taxable income, provided household income is under $150,000. Although a very welcomed provision for the unemployed, there are now many questions being that we are already several months into the filing season and many households with unemployment compensation have already filed their 2020 tax returns.
Wait – My unemployment compensation is not taxable for 2020?
If your household modified adjusted gross income (AGI) is less than $150,000, you can exclude up to $10,200 of unemployment compensation paid to you during 2020 – which means you do not have to pay tax on the unemployment compensation up to $10,200. If your modified AGI is $150,000 or more, you cannot exclude any unemployment compensation.
What if both my spouse and I collected unemployment in 2020? Do we both get this benefit?
Yes – you both potentially get to exclude $10,200 (up to $20,400) assuming you file joint and your modified AGI is under $150,000.
What if our combined income exceeds $150,000, but separately we are both under $150,000? Can we file separate tax returns in order to claim this benefit?
We are awaiting further guidance to be issued by the IRS. However, it does appear that by filing separately, you can avoid the $150,000 cliff and be able to reap the exclusion benefit assuming you have not yet filed a 2020 joint tax return. It is very important to note that by filing separately, you do lose out on potential tax credits and benefits of filing jointly. To put it in perspective – the tax benefits of the unemployment compensation exclusion can range from $1,000 to $2,000, but the tax costs of losing certain credits can be thousands. You really want to make sure you consult a tax professional before going down this road.
This is great, but I already filed my 2020 tax return. Now what?
The IRS issued a statement on March 12 strongly urging taxpayers to not file an amended return at this time, until they issue additional guidance as they are currently reviewing implementation plans for the newly enacted bill.
I wish I would have waited to file like my accountant friends at Wiss advised me! If I had listened, what would I have done?
The IRS has provided an “Unemployment Compensation Exclusion Worksheet” and is working with software providers to update reporting unemployment compensation on 2020 tax returns. In a nutshell, the exclusion should be reported separately from the unemployment compensation on Schedule 1 (Form 1040). The updated instructions for Schedule 1 read to include box 1 of your Form 1099-G on line 7, and to include the exclusion on line 8 as a negative number with “UCE” as the description.
Interesting stuff! Let’s run some numbers. How does it work if I received $20,000 of unemployment compensation and my spouse received $5,000 of unemployment compensation?
Assuming your modified AGI is under $150,000, you would report $25,000 ($20,000 + $5,000) on Schedule 1, line 7 and you would report $15,200 on line 8 as a negative amount with the description “UCE.” The $15,200 excluded from income is $10,200 for you and all of the $5,000 paid to your spouse.
Okay, I think I got the idea at least for Federal purposes – but what about for the states?
Fortunately, here in the great state of New Jersey, unemployment compensation is not taxed so we do not have to worry about the state tax implications of the federal exclusion change. Unfortunately, many other states that do tax unemployment compensation have not yet issued guidance if they will follow the federal law on this or not…so, we play the waiting game.