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. The IRS has updated the Schedule 1, line 7 and line 8 instructions to account for this late change to the 2020 tax on unemployment compensation.
The instructions for Schedule 1 (Form 1040), line 7, Unemployment Compensation, are updated to read as follows:
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.
The IRS reminds taxpayers to report the correct amount of unemployment compensation on Line 1, even if different than the amount reported on the tax Form 1099-G.
In addition, 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.
The basics of the calculation for someone with modified AGI less than $150,000 and who received less than or equal to $10,200 of unemployment compensation, is that you enter on Schedule 1, Line 7 the amount received and the excluded amount received on Schedule 1, Line 8 as a negative number (limited to $10,200).
Important Note: You can still qualify for partial exclusion up to $10,200 if your unemployment benefits exceed $10,200.
Unemployment Compensation Examples
Example 1: Julie is single and her modified AGI is less than $150,000. She received $13,219 in unemployment benefits. She is eligible to exclude 10,200 in unemployment earnings from her 2020 tax return.
Julie will enter $13,219 on Schedule 1, Line 7 and -$10,200 on Line 8.
Example 2: Harry and Sally are married and file a joint return. Their modified AGI is $113,219. Harry received $16,250 in unemployment benefits and Sally received $6,100 in unemployment benefits.
Harry and Sally will enter $22,350 (16,250 + 6,100) on Schedule 1, Line 7 for unemployment compensation received.
On Line 8, Harry and Sally will enter -$16300 (10,200 + 6,100) to back out the non-taxable amount of unemployment compensation. Remember, Harry is limited to $10,200 of non-taxable unemployment compensation out of his $16,250 of benefits.
Example 3: Jason is single and his modified AGI is 56,123. He received $5,235 in unemployment compensation. All of his unemployment compensation will be excluded for 2020.
Jason will enter $5,235 on Schedule 1, Line 7 and -$5,235 on Line 8.
Example 4: Lori is single and her modified AGI is $155,000. She received $11,200 of unemployment compensation. Since her modified AGI exceeds $150,000, she will not be able to exclude any of her unemployment compensation from income in 2020.
Lori will enter $11,200 on Schedule 1, Line 7.
Other IRS Guidance
The IRS has advised in other communications to not be in a rush to file if you have received unemployment compensation. The IRS needs to provide worksheets to tax software vendors, possibly update e-filing systems, and they will provide more guidance as needed.
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