The American Rescue Plan Act (that was enacted in March 2021) allowed the taxpayer to exclude up to $10,200 of unemployment compensation that they received in 2020.
A taxpayer is eligible for this exclusion if their adjusted gross income (AGI) is less than $150,000 (regardless of filing status and they received unemployment compensation in 2020.
For more information see the Tax Treatment of Unemployment Compensation on the IRS website.
The $10,200 Unemployment compensation exclusion is applicable for 2020 only. It does not apply for unemployment received in 2021.
The unemployment benefits the taxpayer received for 2020 is entered on the 2020 Form 1040, Schedule 1, line 7 and the exclusion will appear on Form 1040, Schedule 1, line 8 as a negative amount with UCE as the identifier of the other income type.
The unemployment compensation exclusion is calculated on a worksheet that is included in the Form 1040 instructions on page 88.
For more information see the 2020 Form 1040 instructions.
The $10,200 exclusion will reduce the taxpayer’s 2020 taxable income. The amount of additional refund that a taxpayer will receive or reduction in the amount of tax that they owed on their 2020 federal return, depends on the reduction in their tax due which will be determined by their filing status and adjusted taxable income.
Yes, unemployment benefits are included in gross income. Unemployment benefits are considered taxable income and must be included on the federal income tax return in the year that they are received.
If the taxpayer filed a federal return before the unemployment income exclusion became law, the IRS should have already automatically adjusted the taxpayer’s return. The IRS will either refund the overpayment or apply it to any outstanding taxes owed.
The taxpayer may need to file an amended federal tax return if the exclusion of the unemployment compensation results in the taxpayer qualifying for deductions and credits that were not claimed on the original return.
For more information see Tax Treatment of Unemployment Compensation on the IRS website.
If you still need to file your 2020 federal tax return, the tax software that you are using will calculate the unemployment income exclusion correctly.
The unemployment benefits the taxpayer receives is entered on Form 1040, Schedule 1, line 7 and the exclusion will appear on Form 1040, Schedule 1, line 8 as a negative amount with UCE as the identifier of the other income type.
For more information, see Tax Treatment of Unemployment Compensation on the IRS website.
If the IRS adjusts the taxpayer’s return for the unemployment compensation exclusion and the taxpayer did not have their refund direct deposited on their original 2020 federal return, the IRS will mail the additional refund to the address that was included on their 2020 tax return.
If the taxpayer had a balance due on their original 2020 federal tax return and the taxpayer paid that amount, then any refund that is due the taxpayer will be mailed to the address that was included on their original 2020 tax return.
Yes. Individuals with a valid ITIN are eligible for the unemployment income exclusion as long as their AGI is less than $150,000.
For more information see the 2020 Unemployment Compensation Exclusion FAQs – Topic A: Eligibility, Question2.
If the IRS adjusts the taxpayer’s original 2020 tax return because the taxpayer did not include the unemployment exclusion on their return, any additional refund amount will either be direct deposited to the bank account that was included on the original return or it will be mailed to them at the address that was included on the original return.
For additional FAQs on the exclusion see 2020 Unemployment Compensation Exclusion FAQs on the IRS website.
The following provides information on how each state is taxing Unemployment compensation after the federal $10,200 exemption was signed into law on March 11, 2021. It also provides information on what each state will require for returns that were filed before the new federal provision was enacted.
|State||Treatment of Unemployment Income||What to Do for a Return that is Already Filed||See the Following on the State website for more info|
|Alabama||Not Taxable||Correct as filed - No adjustment or amended return needed||Income Exempt for Alabama Taxation|
|Arizona||Follows Federal - Allows exclusion||TBD||2020 Conformity Notice|
|Arkansas||Not Taxable||TBD||News Article|
|California||Not taxable||TBD||Impact of Recent Federal Changes|
|Colorado||Full amount is Taxable||TBD||Colorado Impact of Federal Economic Recovery Legislation|
|Connecticut||Follows Federal - Allows exclusion||TBD||Taxpayer Services Bulletin - TSSB 2021-2|
|Delaware||Not Taxable||TBD||Tech Info Memo 2021-1|
|Georgia||Full amount is Taxable||TBD||Information on Unemployment|
|Hawaii||Full amount is Taxable pending legislation||TBD||Updates for Taxpayers|
|Idaho||Full amount is Taxable||TBD||What Pandemic related income is taxable|
|Illinois||Follows Federal - Allows exclusion||Will automatically adjust returns filed before March 15||ARP - Nontaxable Unemployment benefits|
|Indiana||Full amount is Taxable||Correct as filed – No adjustment or amended return needed||Unemployment Income and State Taxes|
|Iowa||Follows Federal - Allows exclusion||Will automatically adjust||Iowa Update Article of 3/29/21|
|Kansas||Follows Federal - Allows exclusion||Must Amend|
|Kentucky||Full amount is Taxable||TBD||Unemployment Benefits Fully Taxable on KY returns|
|Louisana||Follows Federal - Allows exclusion||Must Amend||New Release of March 26|
|Maine||Follows Federal - Allows exclusion||Must Amend||Unemployment Compensation Instructions|
|Maryland||Own calculation - New Form released 4/15||Must Amend||Relief Act Tax Alert|
|Massachusetts||Passed legislation with own calculation similar to Federal||Will automatically adjust||Unemployment Benefits|
|Michigan||Follows Federal - Allows exclusion||Should Amend||Notice Regarding Treatment of Unemployment|
|Minnesota||Full amount is Taxable||TBD||Tax Law Changes|
|Mississippi||Full amount is Taxable||TBD|
|Missouri||Follows Federal - Allows exclusion||Must Amend||Unemployment Tax Relief Facts|
|Montana||Not Taxable||Correct as filed - No adjustment or amended return needed||Unemployment Explanation Article|
|Nebraska||Follows Federal - Allows exclusion||TBD||Tax Changes Due to COVID|
|New Jersey||Not Taxable||TBD||New Jersey - Exempt Income|
|New Mexico||Follows Federal - Allows exclusion||Must Amend||Bulletin 300.22 - Publications ->Bulletins -> 300 Series|
|New York||Full amount is Taxable||Must Amend||NY State implications of recent Fed COVID Relief - FAQs|
|North Carolina||Full amount is Taxable||TBD||Impact of ARP on North Carolina Returns|
|North Dakota||Follows Federal - Allows exclusion||Will automatically adjust returns filed before April 1||News Release - Guidance on Unemployment Benefits|
|Ohio||Follows Federal - Allows exclusion||Must Amend||Update on Unemployment Benefits|
|Oklahoma||Follows Federal - Allows exclusion||Will automatically adjust returns filed before March 15||American Rescue Plan – Unemployment compensation|
|Oregon||Follows Federal - Allows exclusion||Will automatically adjust||ARP - FAQs|
|Pennsylvania||Not Taxable||Correct as filed - No adjustment or amended return needed|
|Rhode Island||Full amount is Taxable||Correct as filed - No adjustment or amended return needed||Guidance on tax treatment of Unemployment Benefits|
|South Carolina||Full amount is Taxable||Must Amend||SCDOR Issues Guidance|
|Utah||Follows Federal - Allows exclusion||Should Amend||What's New For This Year|
|Vermont||Follows Federal - Allows exclusion||Will automatically adjust||New Federal Exclusion for Unemployment Benefits|
|Virginia||Not Taxable||TBD||What you need to know about Virginia's Conformity|
|Washington DC||Follows Federal - Allows exclusion||Must Amend||Unemployment Exclusion Amended Returns|
|West Virginia||Follows Federal - Allows exemption||Must Amend||CARES Act and American Rescue Plan Conformity|
|Wisconsin||Full amount is Taxable||Correct as filed - No adjustment or amended return needed||Unemployment Compensation|