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IRS Issues Guidance on Unemployment Benefit Exclusion on 2020 Tax Returns

By MICHELLE ROBB, CPA

April 6, 2021

Angela Lawrence, Quality Control Coordinator at Klatzkin, contributed to this post.

When the American Rescue Plan Act of 2021 was signed into law on March 11, 2021, it included a provision that allows taxpayers that earned less than $150,000 in modified adjusted gross income to exclude up to $10,200 of unemployment compensation claimed in 2020 on their 2020 individual tax returns (up to $20,400 for married couples filing jointly if both received benefits). Since many people had already filed their tax returns, there was understandably some concern.

On March 31, 2021, the IRS issued guidance for taxpayers who filed their tax returns before this change took place. They announced that taxpayers who already filed their returns and included the unemployment compensation would not need to file an amended return. The IRS will recalculate the correct taxable amount of unemployment compensation and make the necessary adjustments to individual tax returns. This may result in refunds for some taxpayers, and any overpayments that are discovered will either be refunded to individuals or applied to other outstanding owed taxes. The IRS will begin to take these steps in the spring, with the first refunds expected in May and continuing into the summer. The first phase will start with taxpayers eligible for the $10,200 exclusion. The second phase will include the returns of those married filing jointly and other more complex returns.

However, there are certain cases where the IRS recommends that taxpayers file an amended return. If the exclusion now makes a taxpayer eligible for additional federal credits or deductions that they didn’t include on their original tax return, they should file an amended return. For example, if a taxpayer claimed the Earned Income Tax Credit (EITC) on their initial filing and the exclusion makes them eligible for an increase in the EITC amount, the IRS will calculate that refund. However, if the taxpayer did not claim the EITC to begin with, the IRS will not look for or apply for any newly eligible credits. If the taxpayer doesn’t file an amended return, they could potentially miss out on these additional deductions and credits and may not get the refund they deserve. It’s also a good idea to review one’s state return in these cases.

The IRS also issued some guidance for taxpayers who have not yet filed their returns and are eligible for the unemployment benefits exclusion. Those who file electronically will only need to answer some standard questions when preparing their return. For more specific details, see New Exclusion of Up to $10,200 of Unemployment Compensation. For those who don’t file electronically, instructions and updated worksheets are available.

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If you have questions about the information outlined above or need assistance with filing or amending your tax returns, Klatzkin can help. For additional information, click here to contact us. We look forward to speaking with you soon.

©2021 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date and does not constitute accounting, tax, or financial advice. Please consult your advisor concerning your specific situation.

About the Author

Michelle is a Partner in the firm’s tax practice focused on serving the planning and compliance needs of nonprofits, manufacturers and distributors, and professional service firms. She works closely with business owners and executive directors of nonprofits to manage their assurance and audit needs, but primarily focuses on tax planning and compliance. While she enjoys...

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