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A Second Look at the American Rescue Plan Act

Posted on Mar. 25, 2021

We welcome back guest blogger Omeed Firouzi, who works as a staff attorney at the Taxpayer Support Clinic at Philadelphia Legal Assistance, for a discussion of the latest developments in the IRS position and administration of the part of the act dealing with the exclusion of certain unemployment benefits.  The process of the change in the position at the IRS on how to calculate the unemployment compensation excluded by statute from income provides an interesting process to watch, similar to the process last spring that led to changes in how the Service approached the payment of the stimulus checks.  Keith

Since my last post on the American Rescue Plan Act, the IRS has provided two critical updates regarding the $10,200 unemployment compensation tax forgiveness provision of the law:

  1. A taxpayer’s modified adjusted gross income, for purposes of claiming the exclusion, should disregard the amount of unemployment compensation the taxpayer receives. Therefore, if your unemployment compensation in 2020 is what pushes you above the $150,000 adjusted gross income limit for claiming the exclusion, you can still be eligible for the exclusion. You do not count the unemployment compensation you got in 2020 as part of your income when factoring the exclusion. This IRS interpretation of the statute comes on the heels of a debate within the tax community as to how to read this section of the law. Last week, the IRS took the position in its unemployment compensation exclusion instructions that a taxpayer’s unemployment compensation does count towards the $150,000 income limitation for eligibility. Now, they’re saying otherwise.
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