A provision in the American Rescue Plan waives owed taxes for up to $10,200 of your unemployment insurance, but it’s creating a lot of confusion as the tax break only just passed in the middle of tax season. Here’s what you should do to claim it— even if you’ve already filed your 2020 tax return before the provision passed into law.
How the tax break works
Normally—and to the surprise of many newly jobless filers—your unemployment insurance benefit is considered taxable income. As part of COVID relief legislation, however, federal taxes are waived for up to $10,200 in unemployment income for the 2020 tax year, provided that you made $150,000 or less, whether you are single or married. The income limit is a make-it-or-break-it threshold with no phase out, and it must include any unemployment payments as part of the total (e.g., if you make $140,000 but received $10,001 in unemployment, you would not qualify for the tax break).
Note that this tax break only applies to federal taxes, and that many states will still tax your unemployment income, although some don’t (you can look up your state’s policy here).
How to claim the benefit if you haven’t filed your taxes yet
While the total [unemployment] benefits are reported in Box 1 of the Form 1099-G, you will only need to report a partial amount on your Schedule 1 of the Form 1040 federal tax return if you qualify for the new tax break.
First, you report the full amount of unemployment benefits on Line 7 of Schedule 1. Next, you would include the amount of benefits (as a negative amount) you qualify to exclude on Line 8 of Schedule 1.
For example, if you are single with an adjusted gross income (AGI) of $70,000 and you received $15,000 of unemployment benefits during the 2020 tax year, you would enter $15,000 on Line 7 and report -$10,200 on Line 8 of your Schedule 1 of your federal tax return. The IRS will only tax you on $4,800 for the 2020 tax year.
That said, if you find all of this confusing, or rely on software to file your taxes, you might want to wait a few days before filing your tax return. The IRS says it’s working with tax software companies to ensure that the tax benefit can be easily claimed (they’ll provide an additional worksheet to help out paper filers, as well), but this could take at least a few more days, according to CBS.
How to claim the benefit if you’ve already filed
Your best option is to wait until further guidance can be provided, as the IRS has emphatically advised filers not to send an amended tax return just to claim the tax break:
For those who received unemployment benefits last year and have already filed their 2020 tax return, the IRS emphasizes they should not file an amended return at this time, until the IRS issues additional guidance.
Per Kiplinger, the pending guidance might be related to instructions for an amended return. Another possibility is that the IRS is working on an option to automatically adjust the reported taxable income so that no action will be needed on your part. Hopefully that’s the case, as it’s less of a hassle. Plus, the IRS tax deadline of April 15 has been pushed to May 15th, so you’ll have more time, at least.