The COVID-19 pandemic has caused widespread job loss and financial hardship for many Americans. To help alleviate some of this burden, the American Rescue Plan Act of 2021 (ARPA) includes a provision that provides a tax break for individuals who received unemployment benefits in 2020. Specifically, the ARPA allows individuals who received unemployment benefits to exclude up to $10,200 of that income from their 2020 tax return. In this post, we’ll explore how the $10200 unemployment tax break works and how much you can expect to receive.
Understanding the Unemployment Tax Break
Before we dive into the details of the tax break, let’s first review how unemployment benefits are typically taxed. Unemployment benefits are considered taxable income by the IRS, which means that you’ll need to report the benefits you received on your tax return and pay taxes on that income. In addition, many states also tax unemployment benefits.
However, the ARPA provides a tax break for individuals who received unemployment benefits in 2020. Specifically, the first $10,200 of unemployment benefits received in 2020 are tax-free for individuals with an adjusted gross income (AGI) of less than $150,000. This means that if you received $10,200 or less in unemployment benefits in 2020, you wouldn’t owe any federal income tax on that income.
Who Qualifies for the Unemployment Tax Break?
To qualify for the unemployment tax break, you must have received unemployment benefits in 2020. This includes traditional state unemployment benefits, as well as any additional unemployment benefits provided by the federal government through the CARES Act, such as Pandemic Unemployment Assistance (PUA) and Federal Pandemic Unemployment Compensation (FPUC).
In addition, you must have an adjusted gross income (AGI) of less than $150,000 to qualify for the full $10,200 tax break. If your AGI is between $150,000 and $80,000, you may be eligible for a partial tax break. If your AGI is above $150,000, you won’t qualify for the tax break. It’s important to note that the $10,200 tax break is per individual, not per household. This means that if you’re married and both you and your spouse received unemployment benefits in 2020, you may be eligible for up to $20,400 in tax-free unemployment benefits.
How Much Will You Get Back?
The amount you’ll get back from the unemployment tax break depends on the unemployment benefits you received in 2020 and your AGI. If you received $10,200 or less in unemployment benefits and your AGI is less than $150,000, you won’t owe any federal income tax on that income. This means that you’ll get back the full amount of taxes you paid on that income, up to $1,020.
If you received more than $10,200 in unemployment benefits or your AGI is above $150,000, you may still qualify for a partial tax break. The IRS has provided a worksheet to help individuals calculate the amount of their tax breaks based on their AGI and the amount of unemployment benefits they have received.
How to Claim the Unemployment Tax Break
You must file an amended tax return (Form 1040-X) to claim the tax credit if you were eligible for unemployment benefits in 2020 and received them. The IRS has recently announced that they will automatically adjust tax returns for individuals who qualify for the tax break and have already filed their tax returns. However, if you haven’t yet filed your tax return, you’ll need to manually claim the tax break on your tax return.
It’s crucial to note that filing an amended tax return can be a complicated process, so it’s recommended that you consult with a tax professional or use tax preparation software to ensure that you’re filing the amended return correctly. In addition, if you’ve already filed your tax return and the IRS has not automatically adjusted your return, you’ll need to file an amended return to claim the tax break.
When filing your amended return, you’ll need to include Form 1040-X and any supporting documentation, such as your original tax return and your Form 1099-G (which reports your unemployment benefits). Be sure to carefully follow the instructions for completing Form 1040-X and double-check all of your calculations to ensure that you’re claiming the correct amount of the tax break.
Timing and Deadlines
The deadline to file an amended tax return to claim the unemployment tax break is October 15, 2021. However, if you’re expecting a refund from your amended return, it’s recommended that you file as soon as possible to avoid any delays in receiving your refund. It’s also worth noting that some states may not conform to the federal tax treatment of unemployment benefits, so you’ll need to check with your state’s tax authority to see if you’ll need to file a state tax return or an amended state tax return to claim the tax break.
Other Considerations
While the unemployment tax break can provide much-needed relief for individuals who received unemployment benefits in 2020, it’s important to remember that it’s a temporary measure and only applies to 2020 taxes. If you received unemployment benefits in 2021, you’ll need to report that income on your 2021 tax return and pay taxes on that income (unless Congress passes another tax break for 2021). Nevertheless, keep in mind that the unemployment tax break only applies to federal income tax. You may still owe state income tax on your unemployment benefits, depending on your state’s tax laws.
The $10,200 unemployment tax break provided by the American Rescue Plan Act of 2021 can provide much-needed relief for individuals who received unemployment benefits in 2020. To qualify for the tax break, you must have received unemployment benefits in 2020 and have an adjusted gross income (AGI) of less than $150,000. The amount of the tax break you’ll receive depends on the unemployment benefits you have received and your AGI. To claim the tax break, you’ll need to file an amended tax return (Form 1040-X) by October 15, 2021. If you’re unsure how to file an amended return or how the tax break will affect your tax situation, it’s recommended that you consult with tax resolution/consultation services.