IRS Guidance On Unemployment Benefits Exclusion

As we shared in last week’s blog, the American Rescue Plan, which was enacted on March 11, 2021 provides a retroactive exclusion for unemployment benefits received during 2020 (up to $10,200 per taxpayer).

The exclusion is available for taxpayers with adjusted gross income of under $150,000.  When computing income for the purpose of this threshold, include all unemployment benefits received (before applying the exclusion).

The IRS recently released updated instructions for Form 1040, indicating that the full amount of unemployment benefits will still be reported on the line for unemployment compensation, which is line 7 of Schedule 1 of Form 1040, Additional Income and Adjustments to Income.  The exclusion of unemployment benefits will be separately reported on line 8, for other income, and it will be shown as a negative amount marked with the code “UCE” for unemployment compensation exclusion. 

It will take time before tax software is updated to reflect this change, and it will also take time before we know if states will conform to the federal exclusion.  In the meantime, practitioners should consider putting affected clients on extension. 

The Commissioner of the IRS announced on March 18, 2021 that the IRS is planning to automatically refund overpayments for taxpayers who received unemployment compensation and who filed their 2020 income tax returns before the enactment of the law that provides a retroactive exclusion of up to $10,200 on unemployment compensation for the 2020 tax year.  Under this approach, affected taxpayers will not have to file amended 2020 income tax returns to receive the benefit of this retroactive exclusion

The IRS revision to the 1040 instructions is available at: https://www.irs.gov/forms-pubs/exclusion-of-up-to-10200-of-unemployment-compensation-for-tax-year-2020-only