The American Rescue Plan Act allows many Americans to exclude some or all of their 2020 unemployment insurance (UI) benefits from their taxable income. This exclusion is available to taxpayers with a modified adjusted gross income (MAGI) of less than $150,000 for 2020. The IRS recently explained how eligible taxpayers may claim the exclusion.
Eligible single taxpayers may exclude up to $10,200 of UI benefits that they received in 2020, which could significantly reduce their tax. Eligible married couples who file jointly may exclude up to $10,200 of UI benefits per spouse, for a total exclusion of up to $20,400.
If you qualify for the exclusion and have not yet filed your 2020 tax return, you can claim the exclusion when you file. You will need to report the full amount of UI benefits you received in 2020, and then use the new Unemployment Compensation Exclusion Worksheet to figure the amount of your exclusion. A tax professional can help you prepare and file the necessary forms.
In general, if you qualify for the UI benefits exclusion but already filed your 2020 tax return, you do NOT have to file an amended return. The IRS will automatically recalculate your taxable income, and issue a special refund if the exclusion lowers your tax. The special refund will be sent separately from any refund you already claimed on your return. The IRS expects to begin sending these special refunds in May, continuing into the summer.
There is one case when filing an amended return may benefit a taxpayer, however. The income exclusion will make some taxpayers eligible for credits that they did not originally qualify for, such as the Earned Income Tax Credit (EITC). A tax advisor can help you determine whether the exclusion qualifies you for a new credit, and if so, help you file an amended return to claim it.