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IRS Issues Instructions for Unemployment Compensation Exclusion

Posted on Mar. 16, 2021

The IRS has issued instructions on how to file tax returns claiming the new unemployment compensation exclusion, including advice for those who have already filed.

The American Rescue Plan Act of 2021 (P.L.117-2) allows taxpayers to exclude up to $10,200 in unemployment compensation on their 2020 tax returns. Tax professionals had expressed concern in recent weeks about clients eager for the relief and preparers anxious for the guidance.

For individuals who have already filed, the IRS “strongly urges taxpayers to not file amended returns.” Further information on what steps should be taken will come in additional guidance, the tax agency said.

The IRS webpage, updated March 12, explains that individuals with adjusted gross income of less than $150,000 don’t have to pay income tax on up to $10,200 of unemployment compensation paid in 2020. Taxpayers with AGI of $150,000 or more have to pay tax on all unemployment compensation, the IRS noted.

The unemployment exclusion should be reported separately from the taxpayer’s unemployment payments using updated IRS instructions and the IRS’s Unemployment Compensation Exclusion Worksheet, the agency said.

Taxpayers who repaid more than $3,000 in unemployment compensation that they included in gross income in an earlier year should refer to the Repayments section in Publication 525 for details on how to report them, the IRS said.

Unemployment compensation overpayments repaid in 2020 should be subtracted from overpayments made, and the total entered on the worksheet, including the word “repaid,” the IRS said.

“Your state may issue separate Forms 1099-G [Certain Government Payments] for unemployment compensation received from the state and the additional $600 a week federal unemployment compensation related to coronavirus relief,” the IRS instructions warned. All unemployment compensation received should be reported on the worksheet, the agency said.

The IRS also cautioned that some states issue Forms 1099-G to taxpayers electronically rather than by mail. The state’s unemployment compensation website will have details.

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