If you filed taxes jointly with the Internal Revenue Service (IRS) for unemployment benefits received in 2020, both spouses would be eligible for the $10,200 tax exemption under the Biden Administration’s “American Rescue Plan”.
“If you and your spouse file a joint return and your joint modified AGI is less than $150,000, you must exclude up to $10,200 of your unemployment compensation and up to $10,200 of your spouse’s unemployment compensation,” an entry on the IRS website states.
This means that up to $10,200 of unemployment compensation is not taxable on your 2020 tax return. Unemployment compensation amounts over $10,200 are still subject to payment to the IRS.
If you are eligible, you must exclude up to $10,200 of your unemployment compensation from income on your 2020 Form 1040, 1040-SR or 1040-NR; likewise, your spouse.
If your modified AGI is $150,000 or more, you cannot exclude any unemployment compensation from income. This applies to all tax states.
IRS Initiated Correction of Tax Returns for $10,200 Unemployment Tax Exemption
Approximately two weeks ago, the IRS began correcting tax returns to process refunds under the new exemption contained in the third stimulus law.
Unemployment tax refunds will be distributed in two phases.
The distribution will be made in two phases. The first refunds will be sent to taxpayers who filed individual returns, while the second phase, which would run through the end of the summer, will impact individuals with more complex tax returns claiming dependents and tax credits.
IRS to explain adjustment in mailed letter
Within 30 days of receiving the refund, the IRS will send the taxpayer a notice explaining the adjustments that resulted in the application of the exemption. “Taxpayers should keep this notice for their records. Taxpayers receiving refunds should review their return after receiving their notice from the IRS,” the agency urged.
In the event of outstanding debts, the IRS and other entities could seize the refund for the $10,200 exemption in payment of unemployment income taxes.
“These refunds are subject to normal offset rules. Past-due federal income taxes, state income tax, state unemployment compensation debts, child support, spousal support, or certain federal non-tax debts, such as student loans, will be deducted. The IRS will send a notice to the taxpayer if the refund is offset to pay unpaid debts,” an IRS statement said.