March 15, 2021

American Rescue Plan Exclusion of Unemployment Compensation

By Michael D’Addio, Principal, Tax & Business Services & Diane Giordano, Partner, Tax & Business Services

American Rescue Plan Exclusion of Unemployment Compensation Payroll-Based Tax Credits

The IRS has issued guidance on a provision of the American Rescue Plan (ARP) concerning the new exclusion from taxable income of up to $10,200 of unemployment compensation, for certain taxpayers for the 2020 tax year.

The Service has modified the instructions for Form 1040 for returns, which addresses the nontaxable portion of unemployment compensation.

For those taxpayers who have already filed a 2020 personal tax return which includes unemployment compensation, the guidance currently included on the IRS website is advising taxpayers not to take any action at this time.

Marcum is alerting readers to inform them that there may be action needed as soon as amended IRS forms are available.

Background

Unemployment benefits have been taxable since the 1980s. However, the explosion of unemployment compensation payments caused by the coronavirus pandemic creates a problem individual filers who received benefits in 2020. Generally, unemployment benefits are not subject to withholding. Therefore, those receiving benefits would be subject to an income tax that likely was not budgeted for during these difficult times.

The $10,200 income exclusion is intended to cover 17 weeks of the additional $600 federal benefit passed under the Coronavirus Aid, Relief & Economic Security (CARES) Act.

Recent Guidance

The ARP provides for an exclusion from income, solely for 2020, of up to $10,200 of unemployment compensation for a filer(s) with modified adjusted gross income under $150,000. Joint filers may be able to exclude $20,400 of benefits from income taxation if both spouses received at least $10,200 of benefits. The exclusion applies to all types of unemployment compensation, whether from the state or additional federal payments.

Reporting the Nontaxable Amount

For those who have received unemployment benefits but have not yet filed their returns, the IRS suggests waiting until revised forms and instructions are available before considering filing.

For Those Who Have Filed Returns Already

For those who have received unemployment benefits in 2020 and already filed their 2020 tax returns, the IRS emphasizes an amended return should not be filed at this time until additional guidance is issued.

Marcum Observation

More guidance will be issued regarding state conformity and amended return rules. The IRS strongly urges taxpayers to not file amended returns related to the new legislative provisions or take other steps at this time.

If you have any questions regarding the American Rescue Plan or guidance on reporting unemployment compensation, please contact Michael D’Addio at michael.daddio@marcumllp.com or contact your Marcum Tax Advisor.

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