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Unemployment Exclusion

Updated: 10/29/21


Homeless man with sign

What is Unemployment Exclusion

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.


What is Unemployment Initial Exclusion Period

The $10,200 Unemployment compensation exclusion is applicable for 2020 only. It does not apply for unemployment received in 2021.


How do I Report Unemployment Exclusion?

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.


Unemployment Compensation Exclusion Worksheet

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.


FAQs

How much will I get back from the unemployment tax break?

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.

Does unemployment count as gross 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.

Should I file an Amended Return?

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.

I haven’t filed yet and have unemployment on my return. What should I do?

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.

What if the IRS doesn’t have my bank information?

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.

If I have an IRS Individual Taxpayer Identification Number (ITIN) instead of a Social Security Number (SSN), am I eligible for the exclusion?

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.

What if I filed already and now my refund amount is different because I qualify for the Unemployment Exclusion?

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.


Unemployment Exclusion by State

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