With over 40 million people who received unemployment benefits this year, many people are surprised to find out when they do their taxes that this is taxable income. This episode talks about the changes that have happened over the last week regarding unemployment.
In the summer of last year, we talked about how people who were receiving unemployment may be in for a surprise when they do their taxes since that is taxable income. With all that happened last year, there were over 40 million people who received unemployment benefits. Today we will be talking about this since there have been a lot of changes that have happened over the last week or so.
This affects people’s 2020 returns, right?
- Yes, what we are talking about today was made retroactive back to 2020.
Let’s get into it.
- With the recently passed tax law, up to $10,200 of unemployment compensation received will be tax-free for the federal. This is a per person test, so a married couple could get $20,400 of tax-free benefits.
Can you give me an example?
- If a married couple received $15,000 for one spouse and $5,000 for the other, the tax-free benefits would be $15,200.
- This would be $10,200 for the first spouse and $5,000 for the second spouse.
- It is a per-person exclusion.
Does this include the normal unemployment, plus the boost of $600 per week that some received?
- Yes, it would include both.
Is there an income limit?
- Yes and this is where $1 could make all the difference.
- The exclusion is for those with MAGI of $150,000 or less.
- If you are under $150k then you get the tax-free treatment and if you are one dollar over you don’t get it.
What if someone is over?
- Find a way to get your income down.
- Put money into an IRA or contribute to your HSA.
What if you already filed your return?
- It could mean an amended return. But before you do that, I would wait for a little bit.
- The IRS is strongly recommending that taxpayers do not file amended returns at this time. They will be issuing further guidance.
What about state returns?
- Since this came out of left field, most states who do not automatically conform to the IRS regulations will continue to treat this unemployment compensation as taxable.
This can save people a lot of money right?
- $10,200 = $1,200 (12% bracket) $2,200 (22$ bracket)
Please contact us for further information or ask about changes to unemployment.