Unemployment Benefits ExclusionAFO|Wealth Management Forward
IRS Offers Guidance on Unemployment Benefits Exclusion
This past Friday, the Internal Revenue Service posted information on how to correctly compute the exclusion amount of unemployment benefits for this tax cycle. The latest IRS posting explains provisions and offers guidance for Americans eligible for the latest American Rescue Plan Act signed by President Biden last Thursday. A key takeaway is:
- Taxpayers who received stimulus checks and unemployment benefits in 2020, and whose gross income (post-modification) is less than $150,000, don’t have to pay taxes on $10,200 of their unemployment compensation.
Many taxpayers are surprised at this provision that they have to pay tax at all on their unemployment benefits, however, the IRS announced to not file amended returns at this time in coordinance of the latest rescue effort.
- The IRS will provide more provisions that could potentially affect the 2020 tax return cycle or form a retroactive provision taking into account the $10,200 nontaxable unemployment benefits of 2020.
- Additionally, the IRS is currently focusing on distributing the third round of stimulus payments as part of the American Rescue Plan. The IRS guidance page will also include an Unemployment Compensation Exclusion Worksheet, for those receiving unemployment compensation, to correctly calculate their exclusion amount to reflect the latest provisions.
Furthermore, an expected wrinkle in the last American Rescue Plan is the issue of identity thieves filing unemployment claims to take advantage of the Economic Impact Payments. The IRS guidance post did not specifically address this problem, however, a small group of Democratic Senators are pushing an effort to ensure that people receiving stimulus checks are able to understand and use the tax exclusion. They are urging the Treasury and the IRS to carry out a public awareness campaign so individuals are aware of the tax exclusion.