This is how the $ 10,200 tax break for unemployment works

Millions of Americans who received unemployment benefits last year received a new tax benefit from the American Rescue Plan.

This is how it works.

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

Individuals should receive a Form 1099-G showing their total unemployment benefits last year. The number is in box 1 on the tax form.

For married couples, each spouse can exclude up to $ 10,200 from their benefits. That would reduce couples’ joint taxable income by up to $ 20,400.

Amounts in excess of $ 10,200 for any individual are still taxable.

Suppose a married couple had a combined income of $ 100,000. That income includes $ 20,000 in benefits for one spouse and $ 5,000 for another.

This pair can exclude $ 15,200 from tax. (The first spouse only gets a break of $ 10,200 from the $ 20,000.) The couple would pay federal taxes on $ 84,800 in income instead of the initial $ 100,000.

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

This income threshold works like a cliff: Anyone who made $ 150,000 or more last year won’t get a tax break.

The $ 150,000 ceiling is the same for all taxpayers regardless of filing status, such as single or married.

One wrinkle: Taxpayers must use their total unemployment benefit received to determine whether they qualify for the tax break.

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

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

MAGI is a number that the government uses to determine whether you qualify for a number of other tax benefits. (For example, a single filer can’t take a student loan deduction this year if their MAGI is $ 85,000 or more.)

Taxpayers will have to make a calculation to determine their MAGI in 2020.

The formula uses information on Form 1040 and on Schedule 1.

The IRS details the MAGI calculation (and how to claim the unemployment tax break) in online instructions posted Friday. They are entitled “New Exclusion of Up to $ 10,200 Unemployment Compensation.”

“I think it was cool that they were able to take an existing form through which people could get the exclusion,” said Janet Holtzblatt, a senior fellow at the Urban-Brookings Tax Policy Center, of the IRS. They didn’t have to come up with a new form.

“That 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 on their 2020 tax returns, the agency said Friday.

It seems that the drafters of the digital tax need a little more time before their software can take the new rules into account.

“We await additional guidance from the IRS on how unemployment exclusion will be implemented,” said Lisa Patterson, a spokeswoman for H&R Block.

TurboTax expects taxpayer updates later this week, spokeswoman Dominique Koudsi said.

The IRS listed a few other important comments to taxpayers regarding Form 1099-G.

States can issue individual 1099-Gs for state-level benefits and the $ 600 additional federal CARES Act weekly supplement, paid through July last year. If so, the two numbers must be added together.

States may post the forms or send them electronically. Employees should consult the State unemployment benefit websites for more information

If the amount listed in Box 1 of Form 1099-G is incorrect, only list the actual amount of unemployment benefit paid in 2020, according to the IRS. This number is on Schedule 1 (Form 1040), Line 7, Unemployment Compensation.

Furthermore, workers who paid back an overpaid unemployment benefit in 2020 must deduct the amount refunded from the total amount received, according to the IRS. Enter the result on line 7. Also fill in “Refunded” and the amount you have repaid on the dotted line next to line 7.