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Making Finances Simple. Changing Lives.

3/31/2021

Unemployment Taxation

For years the IRS has taxed unemployment as ordinary income. However, the American Rescue Plan Act of 2021 made some changes to unemployment taxation…..
In a last-minute amendment to the $1.9 trillion stimulus bill signed in to law earlier this month, filers were given a new tax exemption on up to $10,200 in unemployment income.
 
This change allows for tax returns with modified adjusted gross incomes less than $150,000 to exclude from income up to $10,200 of unemployment compensation received in 2020. For married filers, both spouses can receive this exemption up to $10,200 each.
 
For those with modified adjusted gross incomes above $150,000, no unemployment compensation can be excluded.

As of this week, the IRS has made yet another change on this front. It has now updated guidelines on figuring the income threshold. Prior to this week, the IRS instructed taxpayers to include the unemployment income in the gross income calculation, but now they can exclude unemployment benefits from the income calculation. To help taxpayers and tax preparers, the IRS announced that it will take steps to automatically refund money this spring and summer to people who filed their return reporting unemployment compensation before the recent changes made by the American Rescue Plan.
 
The IRS systems and tax filing software systems have now been updated to reflect this change. But for those who already filed their tax returns before the American Rescue Plan was enacted, the IRS has said it will issue additional guidance as soon as possible.
 
It appears the IRS will issue refunds from it’s end, and not require amended returns to be filed.
 
California and many other states do not tax unemployment income. But be sure to check with your specific state to see how these changes affect you individually.
 
Feel free to contact us if you have questions regarding this…we’re happy to help!

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