A provision in the American Rescue Plan waives taxes owed for up to $ 10,200 on your unemployment insurance, but it creates a lot of confusion as the tax break has only just expired in the middle of the tax season. Here’s what you should do to claim this – even if you filed your 2020 tax return before the provision went into effect.
How the tax break works
Usually – and to the surprise of many newly unemployed applicants – your unemployment insurance benefit counts as taxable income. However, under COVID relief legislation, up to $ 10,200 in unemployment income will be waived for the 2020 tax year, provided you’ve earned $ 150,000 or less, regardless of whether you’re single or married. The earnings limit is a make-it-or-break-it threshold with no exit and must include all unemployment payments as part of the total (e.g. if you earn $ 140,000 but get $ 10,001 unemployment, you will not qualify for the tax break) .
Note that this tax break only applies to federal taxes and that many states will continue to tax your unemployment income, but some will not (you can look up your state’s guidelines Here).
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This is how you claim the benefit if you have not yet submitted your taxes
The IRS did updated instructions provided about how the waived taxes can be claimed, although this summary of Forbes consultant is clearer:
While the sum [unemployment] The services are listed in field 1 of form 1099-G. You only have to enter a partial amount on your account Appendix 1 of Form 1040 Federal tax return if you qualify for the new tax break.
First, you would report the full amount of Unemployment Benefit on line 7 of Appendix 1. Next, you would report the amount of benefits (as a negative amount) that you want to exclude on line 8 of Appendix 1.
For example, if you are single and have an Adjusted Gross Income (AGI) of $ 70,000 and received unemployment benefits of $ 15,000 in tax year 2020, enter $ 15,000 on line 7 and report $ 10,200 in Line 8 of your Appendix 1 federal tax return. The IRS will only tax you at $ 4,800 for the 2020 tax year.
If you find all of this confusing, or if you rely on software to file your taxes, you should wait a few days before filing your tax return. The IRS says it is working with tax software companies to make sure the tax benefit is easy to claim (they also provide an additional worksheet to help out paper filing), but this could take a few more days. according to CBS.
This is how you claim the benefit if you have already submitted an application
It is best to wait until further guidance can be provided, as is the case with the IRS Filers are strongly advised not to send an amended tax return just to claim the tax credit:
For those who received Unemployment Benefit last year and have already filed their 2020 tax return, the IRS stresses that they should not file an amended return at this point until the IRS issues additional guidance.
Per KiplingerThe pending guidance could relate to instructions for a modified return. Another possibility is for the IRS to be working on an option to automatically adjust the reported taxable income so that no action is required on your part. Hopefully that is the case as it is less of a problem. Also, the IRS tax deadline is April 15th was postponed to May 15thSo at least you have more time.
