Good news for taxpayers who received 2020 unemployment benefits and have already submitted their 2020 tax return! It appears the IRS will not require an amended return to claim the new Unemployment Compensation Exclusion enacted in the American Rescue Plan. 

The American Rescue Plan Act of 2021, enacted March 11, 2021, includes an exemption of $10,200 for unemployment benefits received in 2020 for taxpayers with a modified adjusted gross income less than $150,000. This is a relief to many taxpayers! But it has caused some confusion in the past week since millions have already filed their 2020 individual tax returns.

The IRS’s initial statement regarding the multiple new tax legislation changes urged taxpayers to wait on filing an amended return until they issued further guidance. 

How to Claim the Unemployment Compensation Exemption

On March 16, 2021, the IRS provided basic instructions on claiming the Unemployment Compensation Exemption on the IRS’s website. The initial statement mentioned they will be working with software vendors to ensure the new exclusion is included in returns that have yet to be filed. 

The updated instructions show unemployment compensation should be reported separately from the exemption. For married taxpayers, each spouse is able to exclude up to $10,200. However, they cannot combine their exclusions. For example, if you received $20,200 and your spouse received $5,000 of unemployment in 2020, the exemption would be $15,200 ($10,200 you + $5,000 spouse).

State Treatment of Unemployment Income

Whether or not the Unemployment Compensation Exclusion also applies to your state tax return will depend on the state where you received your benefits. States may decide to not enact federal tax legislation, called decoupling because each state has its own distinct tax code. For example, as of March 12, 2021, Colorado is leaning on its current statutes. Colorado statutes will not adopt any changes after the last day of the taxable year. Meaning that Colorado taxpayers will need to add unemployment compensation back to their taxable income total.

To find out how your state is treating the exclusion, check out this handy chart provided by our tax software vendor.

Messaging from IRS – If You’ve Filed, Don’t Amend

Additional guidance came when Internal Revenue Service commissioner, Charles Rettig, testified before the House Ways and Means Committee on Friday, March 19, 2021. 

In Mr. Rettig’s opening statements (~29:25), he stated, “We believe that we will be able to monitor [unemployment]. And we will be able to announce that individuals will not have to file amended returns to take the exclusion for the $10,200 per person. We hope to be able to announce that in the near future.” 

Multiple sources have interpreted this and further testimony to mean the IRS will automatically handle adjustments to already filed returns without any additional action required. 

This has not yet been officially released by the IRS newsroom with associated timelines for adjustments and related refunds. However, we can expect an official release in the next few days. Keep an eye on the IRS Newsroom or our blog, which will be updated once the details are released. 

What a Relief! 

This exemption should provide relief to approximately 40 million Americans who claimed unemployment insurance benefits in 2020. Their potentially significant tax bills will be reduced. Additionally, taxpayers who’ve already filed will be able to set aside the anxiety of determining how to file an amended return and the appropriate time to do so. 

Let us know if you have questions about a return you’ve already filed. We’re here to help and provide peace of mind. Contact us here