Unemployment Tax Bill

[Lee B]

The 2021 unemployment bill currently being considered by the Senate would exempt the first $10,200  of 2021 benefits paid from from Income Tax. It is unclear whether it will pass. If it does pass it will not exclude any benefits paid during 2020 from Income Tax.

 

Mod edit for anyone reading this - as of today, 3/6/21, Senate passed the bill that now will exclude up to $10,200 of UI benefits for TY 2020. 
 

Edited March 6, 2021 by jklcpa
updated information

[Bart]

21 minutes ago, cbslee said:

The 2021 unemployment bill currently being considered by the Senate would exempt the first $10,200  of 2021 benefits paid from from Income Tax. It is unclear whether it will pass. If it does pass it will not exclude any benefits paid during 2020 from Income Tax.

If the 2021 unemployment bill exempts the first 10,200 of 2021 benefits then it will not help 2020 unemployment anyway

[Pacun]

Number 3 will not stand. There is no way for tax preparers, the IRS to accurately split payments for all tax payers that receive unemployment. Unless (which I doubt) the law will force the states to change form 1099-G and have two boxes: Pre Sept 7 unemployment and post Sept 6 unemployment.

 

[Lee B]

17 hours ago, cbslee said:

The 2021 unemployment bill currently being considered by the Senate would exempt the first $10,200  of 2021 benefits paid from from Income Tax. It is unclear whether it will pass. If it does pass it will not exclude any benefits paid during 2020 from Income Tax.

I should know better than to rely on news reports for accurate information

[jklcpa]

16 minutes ago, cbslee said:

I should know better than to rely on news reports for accurate information

I edited your first post to update it to 2020.

[Randall]

WSJ is reporting 2020.

 

[Dave T]

So many questions surrounding this:

Will states have to reissue 1099-G's?

Will states comply with the exemption?

If we have returns in hand with the 1099 should we hold off on filing?

 

[jklcpa]

23 minutes ago, Dave T said:

So many questions surrounding this:

Will states have to reissue 1099-G's?

Will states comply with the exemption?

If we have returns in hand with the 1099 should we hold off on filing?

 

 

I doubt states will reissue 1099Gs. Why would they need to do that?  I see this as being similar to someone that received a 1099G for a state refund that is only partially taxable under the tax benefit rule. Perhaps we'll have a worksheet or a built-in calculate for the federal, and then each state has its own rules and handling.  Some don't tax it already, some more already made it n/t for 2020 alone, and for those that piggyback federal under normal circumstances, I guess they'll have decisions to make.

As far as holding returns, I posted this in the other similar topic we have going:

Quote

I think at a minimum you now have a responsibility to inform clients of the potential change to their returns and give them the choice to file or wait.

I only have a handful that came in recently and they chose to wait a week or so rather than amend and then have to wait for a refund that may take months to receive, or pay a balance due that will end up a refund once the change is signed into law and is incorporated into the program.  After all, they do hire me to work on their behalf to achieve the best possible result.

 

[Lion EA]

I don't think the states will reissue.

Probably the states that stay coupled with the IRS for most/all items will do the same with UI benefits. The states that decouple are anyone's guess. The states that currently do NOT tax UI benefits probably will continue to do the same.

I have two so far that I'm holding. They're both under the $150,000 threshold, so agree with me to hold.

I want to know the definition of "household." If the dependent who has $12,300 in UI benefits lives with her parents who make well in excess of $150,000, then does that mean the dependent's household income is also over $150,000 and she cannot exclude $10,200 from tax?

And, for Kiddie Tax, after excluding $10,200, is the next $1,100 also not taxable, following $1,100 taxed at child's rate, and excess over $2,200 + $10,200 taxed at parents' rate? Or, does the exclusion of $10,200 include the first $1,100 and the 2nd $1,100 and go straight to parents' rate for the excess over $10,200?

[Randall]

Oh, the tangled web we weave.

 

[GLJEANNE]

So many returns to amend.....  because of course, many of these folks are the same ones due refunds, and so come in early. 

Anyone think there's a chance the IRS will say they can figure this for returns already filed, and automatically issue refunds?  Our state does that some years, when the Legislature doesn't conform to federal tax law until May.  But Don't know if i can recall the IRS ever having to do it.

Either way, I'm sure they'll issue guidance in the next couple weeks.  Kind of feel sorry for them, having to do another round of stim checks right in the middle of tax season. 

 

[Lee B]

I remember the IRS recalculating and issuing refunds, I think it was about 12 or 13 years ago, don't remember the details.

[GLJEANNE]

I really hope this is one of those times.  One, I don't want to be amending returns in the middle of the season, but those are folks who won't want to wait for much needed extra refunds.  And two, I hate to have to charge people who are hurting for amended returns that aren't their fault.  Seems like the IRS would be able to flag and recalculate those returns pretty easily, albeit maybe not until summer. 

[Abby Normal]

Unemployment compensation does have its own line on the return, so the IRS could easily do this. Certainly should be less work for them than processing millions of amended returns.

Hopefully we'll get some news soon. Congress is supposed to pass the Senate version on Tuesday, so hopefully IRS will issue some guidance by the end of the week?

[TAXMAN]

Its amazing. I took unemployment out and ctc and eic all of a sudden showed up. Reckon these were thought out before hand?

[Pacun]

I think income will be adjusted but EIC will stay using the exempted unemployment as part of the formula.

 

[Lion EA]

Kiddie Tax!

[Lee B]

1 hour ago, Pacun said:

I think income will be adjusted but EIC will stay using the exempted unemployment as part of the formula.

 

First, Unemployment Benefits are not earned income for EIC purposes. Second, the $ 10,200 which is exempt from income tax will not be included in AGI,

unless there is a specific adjustment to add it back.

[Pacun]

8 hours ago, cbslee said:

First, Unemployment Benefits are not earned income for EIC purposes. Second, the $ 10,200 which is exempt from income tax will not be included in AGI,

unless there is a specific adjustment to add it back.

Let's say you have a child and you $30K in earned income. and you made another $12K in unemployment. You are out of the EIC credit but if your income is reduced by $10,200, you will qualify.  Another example, same person and same child: in this case the person made has 0 earned income for 2020 and collected $42K in earned income. This person doesn't now qualify for EIC even though last year his earned income was $18K. If you reduce his 2020 income by $10,200 then he can use his 2019 earned income and get an nice piece of the pie. I hope this is not the case because the money allocated for this stimulus will be short.

[BulldogTom]

Please answer for me...is the $10,200 exemption just for 2020 or is it for 2021 as well?

Thanks

Tom
Modesto, CA

[Lee B]

Apparently it's for 2020. As far as 2021, who knows? We will have wait and see ?

[jklcpa]

Agree with cbslee.  The Senate's amendment to the bill reads as 2020 only.

 

It says this:

Quote

UNEMPLOYMENT COMPENSATION.
(a) IN GENERAL.—Section 85 of the Internal Revenue Code of 1986 is amended by adding at the end the following new subsection:
‘‘(c) SPECIAL RULE FOR 2020.—In the case of any taxable year beginning in 2020, gross income shall not include so much of the unemployment compensation received by an individual as does not exceed $10,200.’’.
(b) EFFECTIVE DATE.—The amendment made by this section shall apply to taxable years beginning after December 31, 2019.

  As for Pacun's question about income, prior to the above amendment, Sec 85 of the Code said this:

Quote

(a) General rule  - In the case of an individual, gross income includes unemployment compensation.

(b) Unemployment compensation defined:   For purposes of this section, the term “unemployment compensation” means any amount received under a law of the United States or of a State which is in the nature of unemployment compensation.

... and now we will have item ( c) for 2020 from the amendment I quoted above so that gross income will include only that unemployment income in excess of $10,200.

[Burke]

I have one return on the desk not yet filed which has less than $10,200 in unemployment benefits for 2020.  I have input the amount via Form 1099G which flows thru to Line 7 of Schedule 1.  On Line 8 of Schedule 1, I can back it out on the worksheet with an explanation so that it is a net zero on the total at the bottom.  Think this will work?  

[Lee B]

17 minutes ago, Burke said:

I have one return on the desk not yet filed which has less than $10,200 in unemployment benefits for 2020.  I have input the amount via Form 1099G which flows thru to Line 7 of Schedule 1.  On Line 8 of Schedule 1, I can back it out on the worksheet with an explanation so that it is a net zero on the total at the bottom.  Think this will work?  

Since the House votes tomorrow and the President hasn't signed the bill yet, I would put this return on the back burner.

[Burke]

Yes.  I hadn't planned on filing until that happens, but the procedure works as far as the bottom line within the software.