This is how the $ 10,200 unemployment tax reduction works

Millions of Americans who received unemployment insurance last year experienced a further tax break from the American Rescue Plan.

That’s how it works.

Unemployment benefits are generally treated as income for tax purposes. The new tax reduction is an “exclusion” – workers exclude up to $ 10,200 in unemployment benefits from their 2020 taxable income.

Individuals must receive a 1099-G form showing the total of their unemployment benefits in the past year. The number can be found in box 1 of the tax form.

For couples, each spouse can exclude up to $ 10,200 from their benefits. This would reduce the couples’ joint taxable income by a maximum of $ 20,400.

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

For example, let’s say a couple has a combined income of $ 100,000. This 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 is only entitled to $ 10,200 of the $ 20,000.) The couple would pay federal tax on $ 84,800 in income, instead of the initial $ 100,000.

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

This income limit works like a cliff: anyone who earned $ 150,000 or more in the past year receives no tax break.

The ceiling of $ 150,000 is the same for all taxpayers, regardless of the status of the application, whether single or married.

A wrinkle: taxpayers must use the total unemployment benefits received when determining the eligibility of their income for tax breaks.

Let’s say a couple earned $ 140,000 in combined work income last year. Each spouse also received $ 6,000 in unemployment benefits. Their total income would be $ 152,000, disqualifying them from tax breaks.

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

MAGI is a number that the government uses to determine eligibility for some other tax breaks. (For example, a single filer cannot deduct interest on the student’s loan this year if his 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 Appendix 1.

The IRS details the calculation of the MAGI (and how to claim the unemployment tax reduction) in the online instructions published on Friday. They are entitled “New exclusion of up to $ 10,200 unemployment benefits”.

“I think the cool thing is that they were able to adopt an existing form that allows people to achieve exclusion,” said Janet Holtzblatt, senior researcher at the Urban-Brookings Tax Policy Center, on the IRS. “They did not have to invent a new form.

“This is really very efficient.”

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

It seems that digital tax preparers need some more time before their software can keep up with the new rules.

“We are awaiting further guidance from the IRS on how 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 spokesman Dominique Koudsi.

The IRS has listed some other important notes for taxpayers on Form 1099-G.

States can issue separate 1099-Gs for state-level benefits and the additional $ 600 weekly CARES supplement paid through July last year. In this case, the two numbers must be added together.

States can send forms by mail or electronically. Workers should consult the state’s unemployment insurance websites for more information.

If the amount reported in Table 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 be in Appendix 1 (Form 1040), line 7, Unemployment Compensation.

In addition, workers who reimbursed an overpayment of unemployment benefits in 2020 must subtract the reimbursed amount from the total amount received, the IRS said. Enter the result on line 7. Also enter “Refund” and the amount you have reimbursed on the dotted line next to line 7.