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Unemployment Exclusion

Updated: 10/29/21

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.

StateTreatment of Unemployment IncomeWhat to Do for a Return that is Already Filed See the Following on the State website for more info
AlabamaNot TaxableCorrect as filed  – No adjustment or amended return neededIncome Exempt for Alabama Taxation
ArizonaFollows Federal – Allows exclusionTBD2020 Conformity Notice
ArkansasNot TaxableTBDNews Article
CaliforniaNot taxableTBDImpact of Recent Federal Changes
ColoradoFull amount is TaxableTBDColorado Impact of Federal Economic Recovery Legislation
ConnecticutFollows Federal – Allows exclusionTBDTaxpayer Services Bulletin – TSSB 2021-2
DelawareNot TaxableTBDTech Info Memo 2021-1 
GeorgiaFull amount is TaxableTBDInformation on Unemployment
HawaiiFull amount is Taxable pending legislationTBDUpdates for Taxpayers
IdahoFull amount is TaxableTBDWhat Pandemic related income is taxable
IllinoisFollows Federal – Allows exclusionWill automatically adjust returns filed before March 15ARP – Nontaxable Unemployment benefits
IndianaFull amount is TaxableCorrect as filed – No adjustment or amended return neededUnemployment Income and State Taxes
IowaFollows Federal – Allows exclusionWill automatically adjustIowa Update Article of 3/29/21
KansasFollows Federal – Allows exclusionMust Amend
KentuckyFull amount is TaxableTBDUnemployment Benefits Fully Taxable on KY returns
LouisanaFollows Federal – Allows exclusionMust AmendNew Release of March 26
MaineFollows Federal – Allows exclusionMust AmendUnemployment Compensation Instructions
MarylandOwn calculation – New Form released 4/15Must AmendRelief Act Tax Alert
MassachusettsPassed legislation with own calculation similar to FederalWill automatically adjustUnemployment Benefits  
MichiganFollows Federal – Allows exclusionShould AmendNotice Regarding Treatment of Unemployment
MinnesotaFull amount is TaxableTBDTax Law Changes
MississippiFull amount is TaxableTBD
MissouriFollows Federal – Allows exclusionMust AmendUnemployment Tax Relief Facts
MontanaNot TaxableCorrect as filed  – No adjustment or amended return neededUnemployment Explanation Article
NebraskaFollows Federal – Allows exclusionTBDTax Changes Due to COVID
New JerseyNot TaxableTBDNew Jersey – Exempt Income
New MexicoFollows Federal – Allows exclusionMust AmendBulletin 300.22 – Publications ->Bulletins -> 300 Series
New YorkFull amount is TaxableMust AmendNY State implications of recent Fed COVID Relief – FAQs
North CarolinaFull amount is TaxableTBDImpact of ARP on North Carolina Returns
North DakotaFollows Federal – Allows exclusionWill automatically adjust returns filed before April 1News Release – Guidance on Unemployment Benefits
OhioFollows Federal – Allows exclusionMust AmendUpdate on Unemployment Benefits
OklahomaFollows Federal – Allows exclusionWill automatically adjust returns filed before March 15American Rescue Plan – Unemployment compensation
OregonFollows Federal – Allows exclusionWill automatically adjustARP – FAQs
PennsylvaniaNot TaxableCorrect as filed – No adjustment or amended return needed
Rhode IslandFull amount is TaxableCorrect as filed – No adjustment or amended return neededGuidance on tax treatment of Unemployment Benefits
South CarolinaFull amount is TaxableMust AmendSCDOR Issues Guidance
UtahFollows Federal – Allows exclusionShould AmendWhat’s New For This Year
VermontFollows Federal – Allows exclusionWill automatically adjustNew Federal Exclusion for Unemployment Benefits
VirginiaNot TaxableTBDWhat you need to know about Virginia’s Conformity
Washington DCFollows Federal – Allows exclusionMust AmendUnemployment Exclusion Amended Returns
West VirginiaFollows Federal – Allows exemptionMust AmendCARES Act and American Rescue Plan Conformity
WisconsinFull amount is TaxableCorrect as filed – No adjustment or amended return neededUnemployment Compensation
Mark Castro, CPA

Mark Castro, CPA

Mark has been with CrossLink Professional Tax Solutions (CPTS) since 2008, but has been in the tax industry since 1990. As the government/tax industry liaison for CPTS, Mark has been very active in working with the IRS, States, and other tax industry members to help improve communications, promote standardization, and simplification of eFile systems. Mark has also been active with industry associations as a board member of the National Association of Computerized Processors (NACTP) and the Council of Electronic Revenue Communication Advancement (CERCA) for many years. These two associations work with the IRS and States to help solve key eFile and electronic tax system issues and work to improve the operations of the State and IRS eFile systems.
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Recent Tax Updates