The legislation, signed on March 11th, allows taxpayers who earned less than $150,000 in modified adjusted gross income to exclude unemployment compensation. Those who are married and filing jointly can exclude up to $20,400, and all other eligible taxpayers can exclude up to $10,200. The legislation excludes only 2020 unemployment benefits from taxes. Unemployment benefits are generally treated as income. The new tax break is an “exclusion” — meaning workers can exclude jobless benefits from their 2020 taxable income. Individuals should receive a Form 1099-G (find the form here: 1099-g form), showing their total unemployment compensation last year.
Because the change occurred after some people filed their taxes, IRS will recalculate taxes on 2020 unemployment benefits and automatically issue refunds. The first refunds are expected to be made in May and will continue into the summer. For those who have already filed and figured their tax based on the full amount of unemployment compensation, the IRS will determine the correct taxable amount of unemployment compensation and tax. Any resulting overpayment of tax will be either refunded or applied to other outstanding taxes owed.
For those who have already filed, the IRS will do these recalculations in two phases, starting with those taxpayers eligible for the up to $10,200 exclusion. The IRS will then adjust returns for those married and filing jointly taxpayers who are eligible for the up to $20,400 exclusion and others with more complex returns. There is no need for taxpayers to file an amended return unless the calculations make the taxpayer newly eligible for additional federal credits and deductions not already included on the original tax return.
The IRS strongly encourages people who have not already filed their federal income tax returns to do so electronically. It has worked with the tax return preparation software industry to incorporate the tax implications of the American Rescue Plan “so people who choose to file electronically simply need to respond to the related questions when electronically preparing their tax returns.
Watch President Biden’s interview regarding the legislation here: