The Internal Revenue Service updated its frequently asked questions page Wednesday with new and updated information about the exclusion provided under the American Rescue Plan Act of 2021 of up to $10,200 in unemployment income for 2020 and how it affects eligibility, amended returns and other matters.
The updated
The American Rescue Plan Act of 2021 offered relief to people who received unemployment compensation in 2020 at the height of the pandemic when companies were laying off millions of workers. It excludes up to $10,200 of unemployment compensation payments from gross income if the taxpayer’s modified adjusted gross income is less than $150,000. For married individuals filing a joint tax return, the exclusion of up to $10,200 applies to each spouse.
The rules changed midstream last tax season, and many taxpayers decided to file amended returns. Some of those amended returns are still stuck in the IRS backlog, before the IRS said it would make the adjustments itself. An updated section of the FAQs asks, “What if I already filed my 2020 tax return? Do I need to file a Form 1040-X to amend my tax return to report the exclusion?”
The answer from the IRS is that unless the taxpayer is entitled to a credit or deduction they didn’t claim on the 2020 tax return they’ve already filed, there's generally no need to file an amended return (Form 1040-X) to report the amount of unemployment compensation received in tax year 2020 to exclude on your 2020 tax return. “The IRS began performing the corrections
starting in May 2021 and continues to review tax year 2020 returns and process corrections to issue any applicable refund that is due,” said the IRS fact sheet. “If you already filed your 2020 tax return, we'll determine the correct taxable amount of unemployment compensation
and tax. We'll also adjust any non-refundable or refundable credits you reported on your return that are impacted by the exclusion and issue any refund due. In addition, if you did not claim the Recovery Rebate Credit or the Earned Income Tax Credit with no qualifying children on your tax return, but you are now eligible when the special unemployment exclusion is applied for tax year 2020, you do not need to file an amended 2020 tax return. If you are now eligible, the IRS will calculate these credits for you and include them in any overpayment and any refund due.”
However, the IRS provided one important exception: “You should not file an amended return to claim the Additional Child Tax Credit (ACTC) or Earned Income Tax Credit (EITC) if you reply to a CP08 or CP09 notice stating you may be eligible for one of these credits and you are not
requesting any other changes be made to your 2020 tax return.”
For taxpayers who received those notices, the IRS refers them to other FAQ pages.
The IRS noted that any resulting overpayment of tax will be either refunded by direct deposit or by paper check or will be applied to the taxpayer’s other outstanding tax liabilities. A notice confirming the change will be sent to the taxpayer when their return has been corrected. Taxpayers should keep that notice in your records in case their tax preparer or state department of taxation asks for a copy.
In another updated FAQ, the question is: “What if I know I'll be entitled to a credit or deduction that wasn't claimed on my tax return? Should I file an amended return?”
The answer is it depends. “If you are eligible to exclude up to $10,200 in unemployment compensation and the exclusion makes you eligible for a credit or deduction not claimed on your original return, you should file an amended return to claim the credit or deduction,” said the IRS. “You can file this amended return electronically if the original return was filed electronically.”
But again, there are some exceptions. If the taxpayer is eligible to exclude up to $10,200 in unemployment compensation, they do not need to file an amended return to claim the Recovery Rebate Credit or the Earned Income Tax Credit with no qualifying children, even if it wasn’t claimed on their return. If they are now eligible for these credits when the unemployment exclusion is applied, the IRS will calculate the credit for them and include it in any applicable overpayment.
Similarly, as inte guidance above, taxpayers should not file an amended return to claim the Additional Child Tax Credit or Earned Income Tax Credit if they reply to a CP08 or CP09 notice stating they may be eligible for one of these credits and they’re not requesting any other changes be made to their 2020 tax return. The IRS will adjust the credits already claimed on the return that are affected by the exclusion.
The IRS gives some examples: “You didn't claim the EITC or ACTC for your qualifying children on your 2020 tax return because your AGI was too high. Because the unemployment compensation exclusion reduced your AGI, you're now eligible for an EITC or ACTC, but did not receive the credit after your unemployment compensation exclusion was applied,” said the IRS. “In this case, you need to either (1) reply to a CP08 or a CP09 notice if you received it or (2) file an amended return including a Schedule EIC to claim the EITC, Schedule 8812 to claim ACTC, and any other credits (other than the Recovery Rebate Credit or the Earned Income Tax Credit with no qualifying children) not claimed on your original return. If, instead, you claimed $50 in EITC on your 2020 tax return, don't file a Form 1040-X solely to change the EITC amount. The amount of this and other credits that you claimed on the original return will automatically be adjusted by the IRS when we apply the exclusion.”
A new question on eligibility was added Wednesday: “I was unemployed in 2020, but payment of my unemployment compensation was delayed until 2021. Do I qualify for the unemployment compensation exclusion?”
The answer is no. The IRS pointed out that the American Rescue Plan provides unemployment compensation exclusion relief only for unemployment compensation received in 2020, but the exclusion does not apply to unemployment compensation received in 2021.
