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How the $10,200 unemployment tax break works

The American Rescue Plan has given unemployed Americans an opportunity to save some serious money on their taxes. 

In early March, President Biden signed a $1.9 trillion Covid relief bill that waives federal tax on up to $10,200 of unemployment benefits an individual received in 2020. This benefit applies to this tax-filing season which was extended and now ends on May 17, 2021.

In this post, we’re breaking down exactly how it works, who’s eligible, and how to claim those benefits with a few clicks of a button.

A quick rundown on the $10,200 tax break

Given the complications that are partly due to timing, this new law may prove a little confusing for many Americans. If you qualify, though, it could end up saving you thousands of dollars

If you received unemployment benefits in 2020, you should have received a statement (Form 1099-G) from your state unemployment insurance agency. This statement will detail how much in unemployment payments you received during the year 2020. It also shows how much you paid in federal taxes (if you opted to have them withheld). 

The total benefits accrued are reported in Box 1 of the Form 1099-G, but just a fraction may need to be declared on your Schedule 1 if you qualify for the new tax break.

Here’s an example:   

Let’s say you’re single and make $65,000 a year in salary with $12,500 coming from unemployment benefits for the 2020 tax year. On Line 7 of your federal tax return is where you enter the amount of total money received ($12,500).

On Line 8, you would report the amount of benefits you are qualified to exclude from your compensatory income — as a negative number — (-$10,200).

Doing so means the IRS will only tax you on $2,300 for the 2020 tax year.  

Who’s eligible?

The new tax plan will undoubtedly give a lot of people their own money back, but not everyone qualifies for the tax cut. If your adjusted gross income is $150,000 or less in 2020 and are filing taxes as single or married then this break is for you! 

That withstanding, if your adjusted gross income was over $150,000 last year — even by just one dollar — you’re out of luck when it comes to receiving any relief from these changes.

Here’s where things get a little more complex.  

Taxpayers must use their total unemployment benefits received when determining eligibility for the tax break. This could be detrimental to many people, such as a (hypothetical) couple that made $140,000 in combined job income last year and each spouse also got an equal amount of unemployment benefits totaling up to $6,000. These individuals would not qualify for this deduction because their total annual salary ($152,000) pushes them over the maximum threshold of $150,000. 

What should you do if you already filed your taxes?

If you have already filed a tax return, then it is likely that you have claimed your full unemployment benefits as taxable income.

But don’t worry, you’re not alone. 

The IRS estimates that more than 23 million Americans filed for unemployment last year and as of March 5th, 55.7 million tax returns had already been filed. As a result, they recently announced that taxpayers who have already submitted their returns will not need to resubmit them in most cases. 

Instead, they will take it upon themselves to adjust qualifying returns automatically during two phases.

The process will begin with individual taxpayers before moving on to couples filing taxes jointly. The IRS estimates that people who meet the qualifications will begin receiving a tax refund as soon as May, and they will continue processing refunds through summer. 

If there are any changes or corrections to outstanding payments, it will be made in the form of an adjustment reported on your next year’s taxes. However, if you filed your taxes but it turns out you are eligible for a tax credit, then you’ll have to file an amended tax return.

It’s also important to note that while the IRS will automatically make adjustments to your federal tax return if you qualify for the tax break, this does not apply to state taxes which you will have to handle yourself. 

If you are unsure about your state’s requirements for claiming these tax credits, please consult a qualified professional.

Final thoughts on the unemployment tax break

With tax rates ranging from 10% to just below 40%, the potential tax savings could vary significantly. This means taxpayers filing at rates as low as 10% could save around $1,020 whereas those who file at a rate closer to 37% could expect to save up to $3,825 — depending on the taxpayers filing status, deductions and other factors. 

Do you have questions about your taxes or could you use a hand in the preparation or filing? We’d love to help! Click here to reach out and schedule a discovery call with the team.

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