2020 UNEMPLOYMENT COMPENSATION EXCLUSION
In recent months, there have been many tax changes to help mitigate the financial damage caused by COVID-19. One change that may result in tax savings for you on your 2020 tax return is the unemployment compensation exclusion.
Last year many people lost their jobs due to pandemic shutdowns. Generally, unemployment compensation is included in gross income for federal tax purposes. Thanks to the American Rescue Plan Act (ARPA), enacted on March 11, 2021, up to $10,200 of unemployment compensation can be excluded from federal gross income on 2020 federal returns for taxpayers with an adjusted gross income (AGI) under $150,000. In the case of a joint return, the first $10,200 per spouse isn’t included in gross income. That means if both spouses lost their jobs and collected unemployment last year, they’re eligible for up to a $20,400 exclusion. However, keep in mind that some states tax unemployment compensation that is exempt from federal income tax under the ARPA.
Taxpayers who already filed their 2020 individual tax return without taking advantage of the unemployment compensation exclusion don’t need to file an amended return to take advantage of it. The IRS will take steps in the spring and summer to make the appropriate change to the returns. Any resulting overpayment of tax will be either refunded or applied to other outstanding taxes owed. The first refunds are expected to be made in May and will continue into the summer.
The 2020 unemployment compensation exclusion may be beneficial to you. Contact us if you have questions about your situation and how this affects your state tax return.