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Unemployment Compensation Exclusion


Yardley CPA
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New Exclusion of up to $10,200 of Unemployment Compensation

More In Forms and Instructions

If your modified adjusted gross income (AGI) is less than $150,000, the American Rescue Plan enacted on March 11, 2021, excludes from income up to $10,200 of unemployment compensation paid in 2020, which means you don’t have to pay tax on unemployment compensation of up to $10,200. If you are married, each spouse receiving unemployment compensation doesn’t 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 can’t exclude any unemployment compensation.

The exclusion should be reported separately from your unemployment compensation. See the updated instructions and the Unemployment Compensation Exclusion Worksheet to figure your exclusion and the amount to enter on Schedule 1, lines 7 and 8. 

The instructions for Schedule 1 (Form 1040), line 7, Unemployment Compensation, are updated to read as follows.

Line 7
Unemployment Compensation

You should receive a Form 1099-G showing in box 1 the total unemployment compensation paid to you in 2020. Report this amount on line 7.

Caution. If the amount reported in box 1 of your Form(s) 1099-G is incorrect, report on line 7 only the actual amount of unemployment compensation paid to you in 2020.

Note. If your modified adjusted income (AGI) is less than $150,000, the American Rescue Plan enacted on March 11, 2021 excludes from income up to $10,200 of unemployment compensation paid to you in 2020. For married taxpayers, you and your spouse can each exclude up to $10,200 of unemployment compensation. For example, if you were paid $20,000 of unemployment compensation and your spouse was paid $5,000, report $25,000 on line 7 and report $15,200 on line 8 as a negative amount (in parentheses).  The $15,200 excluded from income is $10,200 for you and all of the $5,000 paid to your spouse. If your modified AGI is $150,000 or more, you can’t exclude any unemployment compensation. Use the Unemployment Compensation Exclusion Worksheet to figure your modified AGI and the amount you can exclude.

If you made contributions to a governmental unemployment compensation program or to a governmental paid family leave program and you aren't itemizing deductions, reduce the amount you report on line 7 by those contributions. If you are itemizing deductions, see the instructions on Form 1099-G.

Caution. Your state may issue separate Forms 1099-G for unemployment compensation received from the state and the additional $600 a week federal unemployment compensation related to coronavirus relief. Include all unemployment compensation received on line 7.

If you received an overpayment of unemployment compensation in 2020 and you repaid any of it in 2020, subtract the amount you repaid from the total amount you received. Enter the result on line 7. Also enter “Repaid” and the amount you repaid on the dotted line next to line 7. If, in 2020, you repaid more than $3,000 of unemployment compensation that you included in gross income in an earlier year, see Repayments in Pub. 525 for details on how to report the payment.

Tip. If you received unemployment compensation in 2020, your state may issue an electronic Form 1099-G instead of it being mailed to you. Check your state's unemployment compensation website for more information.

Unemployment Compensation Exclusion Worksheet – Schedule 1, Line 8

Enter the total of lines 1 through 7 of Form 1040 and Schedule 1, lines 1 through 7. Include the full amount of unemployment compensation you received in 2020 on Schedule 1, line 7.

Use the line 8 instructions to determine the amount to include on Schedule 1, line 8 and enter here. Do not reduce this amount by the amount of unemployment compensation you may be able to exclude.

Add lines 1 and 2.

Enter the total of line 10b of Form 1040 and Schedule 1, lines 10 through 21.

Subtract line 4 from line 3. This is your modified adjusted gross income.

Is the amount on line 5 $150,000 or more?

[ ]Yes. Stop You can’t exclude any of your employment compensation

[ ]No. Go to line 7

Enter the amount of unemployment compensation paid to you in 2020. Don’t enter more than $10,200

If married filing jointly, enter the amount of unemployment compensation paid to your spouse in 2020. Don’t enter more than $10,200

Add lines 7 and 8 and enter the amount here. This is the amount of unemployment compensation excluded from your income.

Subtract line 9 from line 2 and enter the amount on Schedule 1, line 8. If the result is less than zero, enter it in parentheses. On the dotted line next to Schedule 1, line 8, enter “UCE” and show the amount of unemployment compensation exclusion in parentheses on the dotted line. Complete the rest of Schedule 1 and Form 1040, 1040-SR, or 1040-NR.

Page Last Reviewed or Updated: 12-Mar-2021

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4 hours ago, Burke said:

What are the provisions which require it to be added back?

I haven't looked them up myself, but another forum said these calculations require the add-back:

  • Taxable amount of social security
  • Exclusion for US savings bond interest used for higher education
  • Exclusion for employer-provided adoption assistance
  • Limit on deductible IRA contributions by plan participants
  • Limit on student loan interest deduction
  • Limit on deduction for tuition and fees
  • Limit on rental real estate exception to passive activity loss rules

It might take a while for the software vendors to get all this right.

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"The IRS strongly urges taxpayers not to file amended returns related to the new legislative provisions or take other unnecessary steps at this time.

The IRS will provide taxpayers with additional guidance on those provisions that could affect their 2020 tax return, including the retroactive provision that makes the first $10,200 of 2020 unemployment benefits nontaxable. For those who haven't filed yet, the IRS will provide a worksheet for paper filers and work with software industry to update current tax software so that taxpayers can determine how to report their unemployment income on their 2020 tax return. For those who received unemployment benefits last year and have already filed their 2020 tax return, the IRS emphasizes they should not file an amended return at this time, until the IRS issues additional guidance." …

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The IRS message makes me think (hope) that they are examining their systems to see if they can fix these returns automatically and avoid the need for amendments.  Will they do the same thing for the premium advance payments that now don't have to be repaid?

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42 minutes ago, Pacun said:

If unemployment reduces the salary and now some people will qualify for EIC, I doubt the IRS will do anything and we will have to amend. 

Unemployment benefits are not earned income so the exclusion has no effect on earned income.

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1 hour ago, Abby Normal said:

The IRS can and does recalculate EIC.

Yes, but the IRS doesn't not add sch EIC to the return if the client didn't have it to begging with. 
Let say my my W2 income was 32,000 for 2020 and my unemployment was $10K.  I filed in February as single with my daughter. At that point, I was out of the EIC bracket. As a result, I didn't include Sch EIC... I doubt the IRS will add Sch EIC (first, they don't know if my daughter lived with me) since I didn't answer the EIC questions.

Even with the EIC schedule attached, for the IRS to do the calculation, I need to check the box. 

 

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2 hours ago, Pacun said:

Meaning that it is eliminated or is added back?

 

I read it as excluded from gross income if your AGI is below 150k.  And your AGI is your AGI before they performed this magic stunt.

That is why, per IRS instructions, putting the exclusion amount as a negative on line 8 of sch 1 can work.

 

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4 hours ago, TAXMAN said:

If the exclusion of unemployment makes it a O taxable, what to do with Fed withholding as it may not pass the EF status.

There is supposed to be a worksheet created that will start with the amount received that will calculate the nontaxable and taxable portions, so I think we will enter the amounts shown on the 1099G for gross unemployment and tax withheld and let the software go through its calcuations. 

This is one more reason to wait for the software update besides the fact that the nontaxable portion will be an add-back for other calculations on the return. 

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Earlier versions of the law used the word 'household' when referring to the 150k income limit, and I was searching for where they defined 'household.' Now I see they've changed it to 'taxpayer,' and that raises the question of whether that will mean 300k on a joint return. My guess is no, but it makes clear that MFS will help some people this year, even if the MFS rule makes the income limit 75k.

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