The Unemployment Tax Waiver of 2021

According to the Bureau of Labor Statistics, more than 23 million people filed for unemployment in 2020 because of COVID-19. For the first time, some self-employed individuals and other types of workers qualified for benefits as well. Not all states offered the option to withhold taxes from that unemployment, and some people didn’t have it withheld because they needed every cent or because they didn’t realize that unemployment income is taxable, leading to surprise tax bills for many people who had already been struggling.

The American Rescue Plan enacted on March 11, 2021 allows taxpayers who earned less than $150,000 in modified adjusted gross income to exclude unemployment compensation up to $20,400 if married filing jointly and $10,200 for all other eligible taxpayers.

This means you don’t have to pay tax on unemployment up to $10,200 if you’re not married, and if you are married, each spouse receiving unemployment compensation doesn’t have to pay tax on unemployment compensation of up to $10,2000. Amounts over $10,200 for each individual are still taxable. If your modified AGI is $150,000 or more, you can’t exclude any unemployment compensation. If you file Form 1040-NR, you can’t exclude any unemployment compensation for your spouse. Unemployment benefits do not count toward the $150,000 cap.

This is for 2020 unemployment benefits only.

Since the legislation was enacted on March 11 and some people had already filed their taxes, the Internal Revenue Service announced on May 12 that it would recalculate those returns themselves to determine the correct taxable amount of unemployment compensation, and either automatically refund the money or apply it to outstanding taxes rather than having people file amended returns. The first refunds are expected to be made in May, continuing into the summer.

They plan to do the adjustments in two phases: First for single filers, then for individuals and those with more complex returns.

The IRS provided guidance to tax return preparation firms such as H&R Block and TurboTax so that their software will reflect the updates and people who file electronically would just need to answer the related questions when they file. Instructions to assist taxpayers who have not filed yet filed were made available in March and put online at IRS.gov/form1040. Another resource that has instructions on how to to fill out the forms if you haven’t already filed is the post-release form issued by the IRS, found here: New Exclusion of up to $10,200 of Unemployment Compensation..

The only time an amended return should be filed regarding the new unemployment legislation is if the adjustments made by the IRS change your income level and make you eligible for other federal credits and deductions not already included on your original tax return, such as an increase in EITC. If that happens, you’ll have to file an amended return if you did not originally claim the EITC or other credits. You should review your state returns as well.

I saw this coming from last year. The question is, will the waiver be given again for this year?