On March 11, 2021, the American Rescue Plan Act of 2021 (“ARP”) was enacted, allowing an exclusion of up to $10,200 of Unemployment Compensation when reporting income. If you were unemployed during Tax Year 2020, the IRS will provide guidance in the coming days on provisions in the ARP that could affect your 2020 tax returns.
The IRS updated their Line 7 filing instructions for Unemployment Compensation on March 12, 2021. If your modified Adjusted Gross Income (“AGI”) is less than $150,000, income up to $10,200 of unemployment compensation paid to you in 2020 will be excluded from income. If you are married, each spouse receiving unemployment compensation will not have to pay tax on unemployment compensation of up to $10,200. Amounts over $10,200 for each individual are still taxable. If your modified AGI is $150,000 or more, you may not exclude any unemployment compensation.
You should have already received a Form 1099-G showing in box 1 the total unemployment compensation paid to you in Tax Year 2020. This amount gets reported on line 7 of your tax Form 1040. If your 1099-G box 1 has an incorrect amount in the box, the IRS is asking that you enter the exact and correct amount on line 7. A word of caution: Be on the lookout for a state-issued, separate Form 1099-G for unemployment compensation received from the state. The additional $600 a week of federal unemployment compensation related to Coronavirus relief may be reported there. It is important that you include all unemployment compensation received on line 7.
For those of you that have not filed yet, the IRS will provide guidance to determine how to report your unemployment income on the 2020 tax return form via a worksheet. They are working with various software developers to have worksheets available both digitally and in paper format (for those that file on paper).
If you have filed already, do NOT amend your return at this time. The IRS will provide additional guidance.
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