Under the Biden Stimulus (ARP) package which funded another round of unemployment benefit extensions, there was a late provision added that provided a tax break on unemployment insurance (UI) benefits. The now available tax break exempts the first $10,200 in unemployment benefits/compensation received in 2020. For married couples, this amount would be $20,400. This will go a long way to prevent the surprise unemployment income tax hits many jobless American households have seen or are potentially facing in when filing their tax return.
Note however that the approved unemployment income tax exclusion is only for income earned in 2020. At this stage there are no plans in Congressional bills for a 2021 unemployment income tax break (claimed in 2022); the likelihood of which I discuss in the detailed section below.
Covered in this Article:
Payment Status and Schedule of Adjusted Unemployment Tax Refund
The IRS has started issuing additional refund adjustments related to the $10,200 unemployment tax break, with over 7 million refund payments sent to tax payers who earlier paid federal taxes on unemployment compensation received in 2020. The latest round of refund payments will start from mid-July, in addition to the previous rounds in May and June.
For this round, approximately 4 million taxpayers (out of 4.6 million reviewed) are expected to receive a refund. The average net refund is $1,265.
Adjusted refund processing and refunds related to this tax break and stimulus checks will continue over the next few months as the IRS “catches-up” on payments to eligible tax payers, which will include more complex cases/filing status’. It is estimated that up to 15 million tax payers may be eligible for the adjusted refund payments. The IRS has also announced that tax payers will receive refunds, which will be issued periodically, and some will have the overpayment applied to taxes due or other debts. For some there will be no change.
This additional refund, where applicable, will mainly apply to workers who’d filed a tax return before or around March 11th, when the ARPA bill that contained this provision became law. Those who filed after and were able to claim this tax break should have already received this a regular tax refund (if eligible).
Taxpayers will be notified about their potential adjustment via mail, generally within 30 days of the adjustment. This will include additional information on the amount of the tax refund adjustment and any offsets for other authorized debts.
$10,200 Unemployment Tax Break Qualification Criteria
This unemployment income tax break however will only apply to households with total incomes under $150,000 (Adjusted Gross Income, AGI) in 2020. For married couples, the $150,000 limit still applies as it is a household maximum and not a straight filing status doubling like many other income level based credits. Also per recent IRS guidance, this is a hard limit and if your household income is $150,000 or more, irrespective of filing status, you can’t take this tax break on any unemployment income earned in 2020.
Note that this tax break only applies for your 2020 income – used for your tax returns filed in 2021. At this stage no provisions in place for it to apply on your 2021 income (for 2022 filings). But it is highly likely Congress will extend this tax break given elevated levels of pandemic induced unemployment.
On average this tax break could reduce a tax filers liability or increase the refund received by up to $1,020 (or $2,040 for couples). Those who had more than $10,200 in unemployment income in 2020, and there are many states where jobless workers would have received more than this, will still be on the hook for unemployment related taxes above this level.
How the tax break would work and how much would I get back?
John had $21,000 in unemployment benefits in 2020 via the PEUC and FPUC programs. He earned another $30,100 from his job before he was laid off. In this scenario, John’s total 2020 income would be below the $150,000 limit to get the tax break so the first $10,200 of unemployment income would be exempt from taxation. His taxable income (AGI) would essentially be $51,200 – $10,200 = $41,000. Based on this he would likely be able to take other low income tax credits and the standard deduction ($12,400 in 2020) which may mean John gets a pretty decent refund to boot if he paid withholding taxes on his earned income.
Calculating how much you will get back specifically will vary on your tax situation and you can start a free efile return to get an estimate. But for on average the refund related directly to this tax break is between $1,000 and $1,500.
Earned Income Tax Credit (EITC) adjustments
Taxpayers who qualify for the unemployment income exclusion tax break and who have qualifying children may also be eligible for EITC after the unemployment exclusion is calculated based on the lower adjusted gross income (AGI). These tax payers will have to file an amended return to claim any new benefits. The exception to this are those who are single with no children and who become eligible for EITC or where EITC was claimed and qualifying children identified. In these situations the IRS will automatically adjust tax returns and make extra refund payments.
What if I already filed my taxes for 2020 and paid taxes on Unemployment?
The IRS have now issued guidance around this. Basically they are saying that for folks who have filed their 2020 return they do not need to file an amended return (as was originally assumed). The IRS will automatically make the adjustment once they update their systems to review eligibility and process this tax break. If you are eligible you will get an additional refund via direct deposit or in the mail. Tax packages like Turbo Tax and Tax act have updated their software to account for this tax break as well.
The one exception for filing an amended return is if you are able to claim other modified tax credits (like the Earned Income Credit) which would affect your overall AGI and potentially make you eligible for this credit.
What about my 1099-G unemployment tax form?
The IRS receives form 1099-G (reporting unemployment benefit payments) electronically from the individual states’ unemployment agencies. If a tax return or amended tax return is filed reflecting a different amount from form 1099 G, the IRS matching engine will generate a letter to the tax holder showing the discrepancies along with an tax bill for monies due.
The IRS guidance has confirmed that this unemployment tax exclusion should be reported separately from your unemployment compensation.
Does the $10,200 lower your taxable income (AGI)? Tax Credit or Tax Deduction?
Yes. The tax break would act like a credit and reduce your overall taxable income. See example above. It would lower your 2020 tax liability or result in a refund if you can claim the standard deduction and other refundable credits (like the expanded CTC an EITC). See the above point on what to do if you have already filed your tax return.
Should I wait to file my taxes if I can claim this credit?
No. You can claim this now if you have not filed your return. Larger tax preparation companies (like Turbo Tax) have implemented the programming to claim this credit. If you have already filed your return the IRS will review details and make an adjustment to pay back any tax credits per the above update. Adjustment refund payments are expected to start in late May, over several batches through summer.
What If I My State Does Not Tax Unemployment?
This tax break or exclusion is for your federal (IRS) taxes. There are many states that do not tax unemployment benefits or only partially tax them. But this $10,200 tax break would not be impacted by that because it is only applicable against your federal taxes that you file via the IRS.
How does the Tax Break work for Married Couples?
For married couples filing jointly with AGI below $150k where BOTH received unemployment income, each can deduct the $10,200 for a total of $20,400 against their 2020 taxes. If you file Form 1040-NR (for non-residents, trusts and deceased individuals), you can’t exclude any unemployment compensation for your spouse.
Will the Unemployment Tax Break Cover 2021 Income and Claimable in 2022?
Despite millions of Americans facing months of unemployment in 2021 (after a rough 2020), it is unlikely Congress will provide another unemployment income tax break for this year. The cost of this tax break would be hard to absorb in another bill and with an improving economy, the argument for more financial support may be a hard sell politically.
The other reason is that several other tax breaks, like the expanded CTC and third stimulus checks, helped unemployed families indirectly as well. Coupled with (likely) lower taxable income in 2021, it is likely that many unemployed will be at or below the lowest taxable income bracket in any case – so a 2021 jobless may be of limited value.
I will update this article as more information comes to hand and you can subscribe via the options below.