Unemployment tax exclusion and AGI

[Sprocket60]

The IRS states they are treating the first $10,200 of unemployment as excluded income. Does the $10,200 still count towards your AGI?

Example: The income on a 2020 return was $50,000 married filing jointly. Both parties had unemployment and now $20,400 of that is excluded. Does this drop the new AGI down to $29,600 and therefore are now potentially eligible for something like the EITC?

[Sprocket60]

deleted, added example to original post.

[rjs]

Your AGI will be reduced by the amount of unemployment income that is excluded. This could possibly make you eligible for the EITC.

Although the excluded unemployment income is not included in your AGI, the law specifies that the excluded unemployment income must be added back when calculating modified AGI for a number of specific tax benefits other than EITC.

[nancvargas]

But how do you add it to your tax forms. I went through the whole TurboTax program and it does show where to enter the Unemployment tax exclusion. Confused!

[Sprocket60]

Is this something you think would be taken into account when the IRS is calculating the auto refund? Or are they focused solely on the unemployment? 

If they’re just refunding the unemployment, would I wait for the refund then amend my tax return for the EITC?

[rjs]

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@nancvargas wrote:

But how do you add it to your tax forms. I went through the whole TurboTax program and it does show where to enter the Unemployment tax exclusion. Confused!

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@nancvargas  TurboTax has not yet been updated for the unemployment exclusion, and they have not given a date when it will be updated. The American Rescue Plan Act was only signed a little over a week ago.

[rjs]

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@Sprocket60 wrote:

Is this something you think would be taken into account when the IRS is calculating the auto refund? Or are they focused solely on the unemployment? 

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We can only guess at the point, and my guess about what they will do doesn't mean anything. The IRS has not provided any information about what they are going to do. Questions like this will probably be cleared up when the IRS does provide some information.

[sprater18]

Are their any updates.. I have a tax return that has Income, Social Security and Unemploment..Received the 10,200 Tax Break.. The AGI is high because of the unemployment amount so its taxing SS at 50% and it shows an amount due for Federal.. The AGI should be lower but turbo tax is not showing that.. So just wondering what we should do.. Should we wait?? Thanks

[gloriah5200]

Unemployment extension

The first $10,200 of unemployment payments are now tax-free for households with an annual income under $150,000.

If you’ve already filed your 2020 return, you should not do anything. The IRS will refigure your taxes and send any refund amount directly to you.

Go here for more unemployment updates as they become available.

Unemployment FAQs

How will unemployment benefits affect my taxes?

The IRS, and most states, consider unemployment payments as taxable income. This means that you have to pay tax on these payments and report them on your return. With this new law, if your household income is less than $150,000, the first $10,200 of unemployment will be tax free, but any amount you receive above that will be taxed.

To help at tax time, consider withholding taxes from your unemployment payments up front. You can usually do that by marking a checkbox or choosing that option when you’re filling out your request.

When will this update be reflected in TurboTax? When can I file my taxes?

If you haven't filed your 2020 tax return, yet, go ahead and do so. TurboTax will guide you through claiming these additional unemployment benefits.

If you don't see the change in the version of TurboTax you are using, then you could wait a little longer to file your return.  Since IRS extended the filing and paying deadline this year until May 15, then  that should give IRS some additional time to work with the software developers on the best way to cover that in the 2020 return.

You should wait as long as possible giving IRS time to update their systems and the software developers to file your 2020 return if  you haven't already done so.

If you make manual changes in the return, then you will probably be required to paper file the return.  IRS is still processing 2019 paper returns from last year.  It would be better to be able to wait and e-file your return because e-filing is so much faster and more accurate.

If you decide to file before the systems are all updated, then IRS will adjust your return for you.

[Critter-3]

The direct answer is ...  the IRS is going to recompute the ENTIRE return when they fix the unemployment situation ... do NOT send in an amended return.  

[Crystal_S]

I have a similar situation as sprater18: I see the update for the Unemployment Tax Exclusion has been updated in my tax return but I expected the reduction of $10,400 in Unemployment Compensation would also affect the calculation of taxable Social Security Benefits (and Premium Tax Credit- Form 8962 & Credit for Retirement Contributions- Form 8880), but it still shows the full amount of Unemployment Compensation being included in the calculation. Is that correct? 

[rjs]

@sprater18 @Crystal_S 

The section of the American Rescue Plan Act that provides for the exclusion of $10,200 of unemployment compensation specifically says that the excluded unemployment income is NOT to be subtracted from AGI when calculating the taxable amount of Social Security benefits. So TurboTax is doing the Social Security calculation correctly according to the new law, and it is not going to change. The exclusion of unemployment income does not change the amount of Social Security that is taxable.

[sprater18]

@rjs 

I am not sure about that.. Its not just about SS It should be about the taxable income and that should be lowered if there is a 10,200 adjustment.. I am just really confused

[A69_R19]

Unemployment is considered unearned income so it will not reduce your SS benefit, however SS income does count as income when calculating your UI claim.

[JohnW152]

When figuring the excludable amount of Social Security benefits, taxpayers are to include the full amount of unemployment benefits reported on Schedule 1, line 7, unreduced by any exclusion amount. 

See the second Caution under Line 7, Unemployment Compensation on the IRS's New Exclusion of up to $10,200 of Unemployment Compensation page.