Unemployment income and why you might want to change your 2020 tax return

Many taxpayers learned that unemployment benefits are taxed the hard way earlier this year when they filed their 2020 income tax returns. It was a blow to so many, after a horrible year for many more. regards, that Congress included a tax exemption for the first $ 10,200 Unemployment Insurance (UI) in the US Rescue Plan (ARP) passed in March. 2021. Unfortunately, this law was passed after many taxpayers had already filed their tax returns. As panic set in, the IRS asked taxpayers not to file amended returns, but to wait for an automatic adjustment that would come this summer. The adjustments have been made and the last batches of reimbursements are currently being given to the taxpayers concerned. This is great news, but it’s not the end of the story.

Manual review for some returns

Taxpayers who filed after the ARP came into effect were allowed to exclude up to $ 10,200 from unemployment insurance per taxpayer, and many have done so. Unemployment insurance is listed on line 7 of Form 1040, Schedule 1. To claim the exclusion, taxpayers entered a negative amount on line 8 with “unemployment benefit exclusion” or “UCE” entered in the description field. Taxpayers who prepared their returns themselves, however, may have forgotten to include the description. The IRS requires a manual review of any tax return with a negative amount on line 8 and nothing in the description field. Therefore, many such returns are piled up somewhere awaiting their turn for manual review. Taxpayers who have filed their returns and included the exclusion but have not received their refunds should verify that they have included the description. If they did, the yield will likely be released in the last wave of automatic adjustments. Otherwise, they must continue to be patient while their return is manually reviewed.

Additional refunds for taxpayers in community property states

Taxpayers who have received Unemployment Insurance and live in community-owned states may also see “magic money” from the IRS appear in their bank accounts. This was due to late indications which created another automatic adjustment. Unemployment insurance is considered community income in community-owned states. This means that if one of the spouses on a joint return received $ 25,000 in UI and the other spouse received less than the exclusion amount (or nothing), each taxpayer was allowed to exclude an amount. total of $ 10,200. Depending on the couple’s effective tax rate, the savings could range from just over $ 1,000 to a few thousand dollars! Again, the IRS automatically adjusts the returns, but it’s prudent if you’ve filed a joint return in a community-owned state and received more than $ 10,200 in UI to review your direct filings and ensure that you benefit from the maximum exclusion amount available (up to $ 20,400). Again, patience is recommended, but an amended return might be indicated.

Effects of exclusion from unemployment insurance on adjusted gross income

The exclusion from UI is what tax experts call an “over-the-line” adjustment. In other words, it lowers the adjusted gross income (or AGI) of the taxpayer. But the IRS uses a simplified calculation to calculate the refund amount. They take the allowable exclusion amount and multiply it by the taxpayer’s tax bracket and refund the resulting amount. For example, a taxpayer who was entitled to the full exclusion of $ 10,200 but did not take advantage of it and is in the 12% tax bracket would receive a refund of $ 1,224. Isn’t that great?

Yes and no. Yes, because you will automatically receive any additional reimbursement amount related to non-excluded unemployment insurance income. No, because in many cases the drop in the AGI also affects other calculations used on the tax return. Recalculating every item related to the AGI on each relevant tax return would have been impossible for the IRS, even under the best of circumstances. Unfortunately, the simplified calculation used to make the adjustments and issue the refunds could have overlooked other possible tax benefits. For example, lowering the AGI can potentially—

  • Reduce the amount of taxable Social Security income.
  • Increase the refundable portion of the child tax credit.
  • Increase the Earned Income Tax Credit and the American Opportunity Credit.
  • Allow previously suspended passive losses to offset income.
  • Increase the amount of ROTH contributions or the deductible amount of IRA contributions.
  • Increase the amount of the market health care subsidy available to the taxpayer.

Taxpayers who hire a tax professional should mention the UI adjustment to their practitioner during the production season next year. An additional refund request using an amended return can be filed up to three years after the original return is filed (typically three years after April 15 of the filing year). In other words, you have enough time to review the 2020 return as well as the IRS’s automatic adjustments to determine if filing an amended return would result in any additional benefits. Some practitioners even proactively contact clients for whom amended statements are indicated. Taxpayers who prepare their own returns may also want to review their returns and recheck the benefits concerned. Finally, keep in mind that 2020 amended returns can be filed electronically (at least until the IRS closes electronic filing to prepare for the 2022 filing season). Modified returns will still be processed manually, so it may take some time to get these added benefits, but at least they won’t end up in a stack of unprocessed mail.


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