IRS offers guidance on unemployment benefits exclusion
The Internal Revenue Service posted information about how to correctly compute the new exclusion on a portion of unemployment income as Congress pushes the IRS for further tax-filing relief.
The guidance, which the IRS posted on its website Friday, explains a provision of the American Rescue Plan Act that President Biden signed into law last Thursday. Taxpayers who received unemployment benefits in 2020, and whose modified adjusted gross income was less than $150,000, don’t have to pay tax on the first $10,200 in unemployment compensation.
The provision should help millions of taxpayers who lost their jobs last year due to the pandemic. While many states do allow taxpayers to withhold taxes from their unemployment benefits, not all do, and many taxpayers either don’t know they can withhold the money or can’t afford to do it. Many taxpayers are surprised when they learn that unemployment benefits are taxable and find out to their dismay about the requirement when they do their taxes. The new law will be welcome news to many taxpayers who were hoping to get a tax refund for the full amount instead of owing taxes on their unemployment benefits. However, for those who filed early this year, the IRS said taxpayers should not file amended tax returns, which may save some extra work for tax preparers during what is already shaping up to be another hectic tax season.
“The IRS strongly urges taxpayers to not file amended returns related to the new legislative provisions or take other unnecessary steps at this time,” said the IRS in a separate statement Friday. “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.”