Personal Finance

Here’s how the $10,200 unemployment tax break works

Key Points
  • President Joe Biden signed the American Rescue Plan Act of 2021 on Thursday.
  • The $1.9 trillion Covid relief bill gives a tax break on unemployment benefits received last year. The measure allows each person to exclude up to $10,200 in aid from federal tax.
  • The IRS issued instructions Friday for workers who haven't yet filed their taxes. Americans who got jobless benefits in 2020 and already filed their taxes shouldn't yet file an amended return.

In this article

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Millions of Americans who collected unemployment benefits last year got a new tax break from the American Rescue Plan.

Here's how it works.

$10,200 tax break

President Joe Biden signed a $1.9 trillion Covid relief bill Thursday that waives federal tax on up to $10,200 of unemployment benefits an individual received in 2020.

The break applies this tax-filing season, which started Feb. 12 and runs to April 15.

It only applies to federal income taxes. States may decide not to offer the tax break.

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The IRS urged people who already filed their taxes not to file an amended return to claim the break. The agency will issue forthcoming guidance about what to do, the IRS said Friday.

About 40 million people received unemployment benefits last year, according to The Century Foundation. The average person got $14,000 in assistance.

Tax exclusion

Unemployment benefits are generally treated as income for tax purposes. The new tax break is an "exclusion" — workers exclude up to $10,200 in jobless benefits from their 2020 taxable income.

Individuals should receive a Form 1099-G showing their total unemployment compensation last year. The number is in Box 1 on the tax form.

For married couples, each spouse can exclude up to $10,200 of their benefits. That would reduce couples' joint taxable income by a maximum $20,400.

Amounts over $10,200 for each individual are still taxable.

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For example, let's say a married couple had a combined income of $100,000. That income includes $20,000 in benefits for one spouse, and $5,000 for the other.

This couple can exclude $15,200 from tax. (The first spouse only gets a break on $10,200 of the $20,000.) The couple would pay federal tax on $84,800 of income instead of the initial $100,000.

Who's eligible?

Not everyone qualifies for the tax cut. Only people who earned less than $150,000 in 2020 are eligible.

This income threshold operates as a cliff: Anyone who earned $150,000 or more last year doesn't get any of the tax break.

The $150,000 ceiling is the same for all taxpayers, regardless of filing status, such as single or married.

One wrinkle: Taxpayers must use their total unemployment benefits received when determining their income eligibility for the tax break.

Let's say a couple made $140,000 in combined job income last year. Each spouse also got $6,000 in unemployment benefits. Their total income would be $152,000, disqualifying them from the tax break.

Modified adjusted gross income

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The $150,000 income limit technically refers to a measure known as "modified adjusted gross income."

MAGI is a number the government uses to determine eligibility for some other tax breaks. (For example, a single filer can't take a deduction for student loan interest this year if their MAGI is $85,000 or more.)

Taxpayers will have to do a calculation to determine their MAGI in 2020.

The formula uses information on Form 1040 and on Schedule 1.

The IRS details the MAGI calculation (and how to claim the unemployment tax break) in online instructions posted Friday. They're titled "New Exclusion of up to $10,200 of Unemployment Compensation."

"I think what was cool is they were able to adopt an existing form that allows people to get the exclusion," Janet Holtzblatt, a senior fellow at the Urban-Brookings Tax Policy Center, said of the IRS. "They didn't have to come up with a new form.

"That's really very efficient."

The IRS is working with online tax preparers to update current tax software so taxpayers can determine how to report their unemployment income on their 2020 tax return, the agency said Friday.

It appears digital tax preparers need some more time before their software can account for the new rules.

"We are awaiting additional guidance from the IRS on how the unemployment exclusion will be implemented," said Lisa Patterson, a spokeswoman for H&R Block.

TurboTax expects updates to be available to taxpayers later this week, according to a spokeswoman.

Form 1099-G

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The IRS listed a few other important notes for taxpayers regarding Form 1099-G.

States may issue separate 1099-Gs for state-level benefits and the additional $600 weekly federal CARES Act supplement paid through July last year. If so, the two numbers should be added together.

States may mail the forms or send them electronically. Workers should consult states' unemployment compensation websites for more information.

If the amount reported in Box 1 of Form 1099-G is incorrect, report only the actual amount of unemployment compensation paid in 2020, according to the IRS. This number would go on Schedule 1 (Form 1040), line 7, Unemployment Compensation.

Further, workers who repaid an overpayment of unemployment benefits in 2020 should subtract the repaid amount from the total amount received, the IRS said. Enter the result on line 7. Also enter "Repaid" and the amount you repaid on the dotted line next to line 7.