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Coronavirus Aid, Relief, and Economic Security (CARES) Act

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American Rescue Plan – Taxability of Unemployment Benefits Changed

This past week Congress passed a billed called the American Rescue Plan. I’m sure you’ve been hearing about this for some time now. Included, as many already know, are stimulus payments of $1,400 for each eligible recipient plus their dependents. There are also many other provisions, with some being addressed in future newsletters.

Our focus here for this update relates to the taxability of Unemployment Benefits you may have received for the year 2020 and moving forward.

Prior to this bill all unemployment benefits received would be included in your total income and factored in when calculating your income tax.

With the passage of this bill, those taxpayers with adjusted gross income (AGI), for the year 2020 and forward, less than $150,000 will be able to exclude $10,200 of unemployment benefits received from their total income. Yes, the first $10,200 of unemployment benefits would then not be taxable. This also includes the first $10,200 for your spouse, if filing a joint return. In that case a total of $20,400 could then be excluded. And yes, this does include the tax filing year of 2020, many of which have already been completed and e-filed.

As of the distribution of this newsletter, we do have guidance on how this change to law will be treated. However, we are now waiting for an update to the tax forms.

With this very new information, the following is our advice at this time IF you received unemployment benefits during 2020:

  • IF we have NOT already completed your tax returns: We suggest waiting at least several days while we wait for updates in order to properly process and complete your tax returns.
  • IF we have already completed and e-filed your tax returns for 2020: There is a good chance that an amendment to your tax returns will be required in order to recoup tax amounts due back to you. However, we are waiting for guidance from the IRS regarding this situation. Due to this change occurring during our busiest time of year we would begin amending tax returns, if necessary, after April 15th.
  • IF we have already completed your tax returns, but have not yet received authorization to e-file them: We suggest delaying the e-filing of such returns until we receive updates in order to properly process and complete your tax returns. At that time we would then make the necessary changes and “re-run” such returns to reflect this tax law update.

As you can imagine this change to the tax law will affect many tax filers, especially after so many received unemployment benefits during the year 2020.

We will continue to keep everyone as up to date as we possibly can. We are here to help and if you have any questions please feel free to contact us.