Tax Treatment of Unemployment Compensation
The Internal Revenue Service (IRS) announced (IR-2021-71) on March 31, 2021 that it would take steps to automatically refund money this spring and summer to people who filed their tax return reporting unemployment compensation before the recent changes made by the American Rescue Plan.
Please keep in mind that unemployment compensation is taxable, as stated on this IRS article. However, the American Rescue Plan Act of 2021 allows an exclusion of unemployment compensation of up to $10,200 for individuals for taxable year 2020. In the case of married individuals filing a joint Form 1040 or 1040-SR, this exclusion is up to $10,200 per spouse. To qualify for this exclusion, your adjusted gross income (AGI) must be less than $150,000. This threshold applies to all filing statuses and it doesn’t double to $300,000 if you are married and file a joint return. Any unemployment compensation in excess of $10,200 ($10,200 per spouse if married filing jointly) should still be included on the tax return as taxable income.
Already filed a tax return?
In most cases, if you already filed a tax return that includes the full amount of your unemployment compensation, the IRS will automatically determine the correct taxable amount of unemployment compensation and the correct tax. If you paid more than the correct tax amount, the IRS will either refund the overpayment or apply it to other outstanding taxes owed. The first refunds are expected to be made in May and will continue throughout the summer. There is no need to call the IRS or file a Form 1040-X, Amended U.S. Individual Income Tax Return. See IRS to recalculate taxes on unemployment benefits; refunds to start in May for guidance. However, if as a result of the excluded unemployment compensation you now qualify for deductions or credits not claimed on your original return, you should file an amended return. For example, if you did not claim the Earned Income Tax Credit (EITC) on your originally filed return because your AGI was too high, but the exclusion allowed for unemployment compensation now reduces your AGI, you should file an amended return to claim the credit if now eligible.
Preparing your tax return now?
If you are preparing you own tax return, you must determine if you are eligible for the exclusion by considering whether your AGI is less than $150,000. Filing electronically is the easiest way to calculate the correct amount. The IRS has worked with the tax return preparation software industry to reflect these updates so people who choose to file electronically simply need to respond to the related questions when electronically preparing their tax returns. See New Exclusion of up to $10,200 of Unemployment Compensation for for information and examples. For others, instructions and an updated worksheet about the exclusion were available in March and posted to IRS.gov/form1040. These instructions can assist taxpayers who have not yet filed to prepare returns correctly.
For additional information and scenarios, see the Unemployment Compensation Exclusion FAQs.
Georgia Reinstates Pre Pandemic Unemployment Insurance Requirements
In accordance with the plan for reemployment and the announcement to no longer participate in the federal unemployment insurance (UI) programs enacted through the CARES Act and the American Rescue Plan Act, the Georgia Department of Labor (GDOL) will reinstate many of the eligibility requirements waived during the recent pandemic. The last payable week for Pandemic Unemployment Assistance (PUA), Pandemic Emergency Unemployment Compensation (PEUC), Federal Pandemic Unemployment Compensation (FPUC), and Mixed Earner Unemployment Compensation (MEUC) is week ending June 26, 2021, reinstating additional requirements on June 27 for claimants and employers. For more information about this, please click here.
“Effective June 27, 2021, the relief for unemployment benefit charging will end regardless of the reason for unemployment. Unemployment benefits paid for weeks ending on or after June 27, 2021, will be charged to the most recent employer under the law section OCGA 34-8-43,” says Daniel Ahart, chief tax officer at the tax preparation company Daniel Ahart Tax Service®
If you need help with filing your taxes, please contact us at your earliest convenience. Schedule a consultation with your tax experts now.
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