By now, you’ve heard about the tax break on unemployment compensation that was apart of President Biden’s $1.9 trillion American Rescue Plan (ARP).
With the 1st $10,200 of unemployment benefits becoming tax free for some filers under the ARP many were left wondering if they would have to file an amended return if they already filed their 2020 return.
Here’s the latest updates you need to know.
The IRS said on Tuesday, March 23, that an amended return will not be necessary.
“If you have already filed your 2020 Form 1040 or 1040-SR, you should not file an amended return at this time,” the IRS wrote in a statement on March 23.
“The IRS will issue additional guidance as soon as possible,” the IRS wrote.
Speculation surrounding the “further guidance” is that the IRS will be able to automatically process the credit to taxpayers accounts, but nothing has been confirmed yet.
UPDATE APRIL 1, 2021 – The IRS issued further guidance and stated the credit will be automatically processed to taxpayers’ accounts UNLESS your lower income now qualifies you for new credits and deductions that were not claimed on your original return.
“There is no need for taxpayers to file an amended return unless the calculations make the taxpayer newly eligible for additional federal credits and deductions not already included on the original tax return,” the IRS wrote.
The automatic adjustments will occur in 2 phases. The first phase will start with individual filers and will then handle married filing jointly couples in the second phase.
The 1st set of refunds as a result of the automatic adjustments are expected sometime in May.
The IRS also changed the calculation on the worksheet so that the $150,000 income limit doesn’t include unemployment pay, which allows more people to qualify.
Initially when the ARP was signed on March 11, 2021, the IRS worksheet was configured so that the $150,000 income cap included unemployment benefits. As a result, many individuals whose adjusted gross income (AGI) exceeded $150,000 did not initially qualify for this tax break.
Now under the new provisions issued March 23, unemployment pay is not factored into individuals AGI and more taxpayers can qualify for the $10,200 exclusion from income.
Let’s Review The 2020 Unemployment Tax Break
Now that we have gone over what’s new, let’s look and go over the tax break as a whole.
The ARP states that the 1st $10,200 of unemployment received in 2020 is not subject to federal taxes for filers with an adjusted gross income under $150,000. Married couples that fall within the income requirements are eligible for $10,200 of unemployment per spouse to be tax free, for a total of $20,400. Usually there are different caps based upon your filing status, but this time around the 150,000 AGI cap is for all types of filers, both single and married.
Anything over $10,200 will be taxable. Those who make over $150,000 or file Form NR, are not eligible for this deduction.
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Christopher Boyer is an Accountant, Bookkeeper, Enrolled Agent & QuickBooks Pro Advisor. Chris provides a wide array of business consulting services, taxes and IRS representation for business owners, individuals, families, corporations, trusts, and estates.