Small Business Taxes & Management

Special Report

IRS Provides Guidance on $10,200 Unemployment Exclusion


Small Business Taxes & ManagementTM--Copyright 2021, A/N Group, Inc.


Filed your 2020 taxes early and missed out on that $10,200 per person exclusion on unemployment benefits? Well, if you haven't filed an amended return, the IRS has now released the answer to your dilemma. It's announced that it will take steps to automatically refund money this spring and summer to people who filed their tax return reporting unemployment compensation before the recent changes made by the American Rescue Plan.

The legislation, signed on March 11, allows taxpayers who earned less than $150,000 in modified adjusted gross income to exclude unemployment compensation up to $20,400 if married filing jointly and $10,200 for all other eligible taxpayers. The legislation excludes only 2020 unemployment benefits from taxes.

For those 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 taxes owed. The IRS will do these recalculations in two phases, starting with those taxpayers eligible for the up to $10,200 exclusion. The IRS will then adjust returns for those married filing jointly taxpayers who are eligible for the up to $20,400 exclusion and others with more complex returns. If you're in the latter group you may not get your refund until the summer. There is no need to file an amended return unless the calculations make you newly eligible for 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.

How many individuals are affected? A lot. Tax professionals, depending on their client mix, may see 6 to 10 percent of their clients each year with unemployment. This year it may be closer to 25 to 30 percent. For some the difference could be much higher.

The good news is that if you haven't filed, all reputable tax software packages have released versions with the updates, generally for both federal and state. All you need do is download the update. If you do the computations by hand, the IRS has

If you have filed before the tax law change you need not file an amended return. With two buts. The first, because the recalculations and refunds by the IRS will be done in two stages. The first is for taxpayers claiming just a single exclusion, that is for just one person. Those refunds are anticipated to start in May. Those in the second group may not see a refund until the summer. If you're in the second set you may want to file an amended return now to get the refund sooner. But if you plan that approach, you should do so soon to avoid the refund and the amended return crossing paths. The second but involves complex returns. There is a significant amount of interaction on complex returns. For example, the exclusion will lower your AGI which will affect your ability to take a deduction for rental losses, the calculation of capital gains, etc. At the very least you should input the exclusion and rerun the numbers with the updated software and when you receive your refund make sure it's been accurately calculated.

Had your return done professionally? Take to your tax preparer.

There's another issue--your state return. The exclusion may result in a state tax refund, and the IRS isn't going to do that for you. You'll most likely have to file an amended return to recover the exclusion savings. Again, if you used software to prepare your return, it was updated to handle the change. The only information we can currently provide on state returns is that Colorado, Georgia, Hawaii, Idaho, Kentucky, Massachusetts, Minnesota, Mississippi, North Carolina, New York, Rhode Island, South Carolina and West Virginia have not followed Federal law in excluding the first $10,200. (Massachusetts announced on April 2 it will allow the exclustion for taxpayers with household income under 200 percent of the poverty level.) You should monitor the rules in your state. These taxpayers may want to review their state tax returns as well.


Copyright 2021 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536

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--Last Update 04/02/21