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IRS Expands Eligibility Pool for Exclusion of 2020 Unemployment Benefits

IRS Expands Eligibility Pool for Exclusion of 2020 Unemployment Benefits

When the US Government passed the American Rescue Plan Act of 2021, one of the highlights was the ability to exclude up to $10,200 of unemployment income for households earning under $150,000.

From the passage of the act until Tuesday, March 23, taxpayers had to count unemployment benefits as part of their 2020 income when determining if they qualify for the tax break.

On Tuesday, the IRS announced additional guidance which effectively expands the pool of people who will meet this exclusion.

  • Taxpayers can exclude jobless benefits from the initial calculation of modified adjusted gross income (MAGI), the official barometer for eligibility
  • Previously, taxpayers had to first include their jobless benefits in their MAGI

Working example:

A married couple filing MFJ with income of $145,000 and each with unemployment income of $10,200.

Under prior guidance, this couple would not have qualified for the tax break as their MAGI would have included the unemployment income of $20,400 ($10,200 * 2 taxpayers). Under the new guidance, they would also be eligible for this exclusion.

Do not file amended returns if you already filed

As a reminder, the IRS has indicated to not file amended returns to claim unemployment benefits — the IRS will apply them automatically.

If you have not yet filed, your tax preparer will take this into account when preparing your tax returns. Note, your return takes additional time to process while the tax software companies update tax forms to accommodate new guidance.

What if I already filed my 2020 tax return and didn't qualify for the third round of Economic Impact Payment (EIP) or received less of it because of my AGI, will the payment now be sent to me if the unemployment compensation exclusion reduced my AGI and makes me eligible for the payment or for more?

No. Your third EIP was calculated using the information from your first tax return. After applying the unemployment compensation exclusion, the IRS will not reassess or provide more money. If you weren't eligible for the payment or received less than the entire amount on your 2020 tax return, you may be eligible to collect the 2021 Recovery Rebate Credit on your 2021 tax return.

Ines Zemelman, EA
Founder of TFX