How to claim your unemployment tax break on 2020 benefits

If you lost a job in 2020 and received unemployment benefits to make ends meet, Congress this month approved a tax break for you.

The catch, though, is the break came in the middle of tax season — after forms had been printed and after many already filed their returns.

The Denver Post consulted the IRS and Alex Oware, a certified professional accountant at O&G Tax and Accounting Services in Lakewood and a freelance tax expert on JustAnswer.com, to provide some answers.

What exactly is the tax break for those who received unemployment compensation in 2020?

The $1.9 trillion American Rescue Plan allows those who received unemployment benefits to deduct $10,200 in payments from their 2020 income.

The benefit only applies to those whose modified adjusted gross income is less than $150,000, according to the IRS’s website.

If your modified AGI is $150,000 or more, you can’t exclude any unemployment compensation. If you are married and both spouses received unemployment, then both are exempt from paying taxes on the first $10,200 they each received. So combined, that totals $20,400.

Amounts over $10,200 for each individual are still taxable.

Why is this a big deal to the unemployed?

First, any tax break is welcome.

More importantly, in 2020, the federal government kicked in extra unemployment benefits and some recipients found the extra money jeopardized their earned income credits, causing them to owe money when they didn’t expect it.

Also, many people filing for unemployment did not withhold taxes because their financial situations were dire and they needed all the money they could get at the time. This either will eliminate a tax burden or significantly reduce it for many of those people.

The IRS printed its 2020 tax forms and TurboTax and other companies programmed software before the relief was approved by Congress. How do I claim my $10,200 deduction?

You need to file an Unemployment Compensation Exclusion form when you do your taxes, Oware said. Here’s a link to it on the IRS website if you are filing on paper: tinyurl.com/unemploymenttax. Follow the worksheet’s instructions when filling out your forms.

The IRS also says it’s working with the software companies such as TurboTax to update their software for the 2020 tax season, so people who qualify for the tax break on unemployment benefits should hold off on filing until those programs are brought up to date.

Note: The IRS recognizes that some people received incorrect 1099-G forms, and its website advises filers to only report the actual amount they received.

What if I already filed my taxes and now I am missing out on the deduction?

The IRS is asking people to wait and not file an amended return, Oware said. The agency will issue further guidance for you later in the tax season. It is likely the IRS automatically will calculate what benefit you should have received and will refund you later in the year, he said.

“They’ve been asked not to amend their tax returns,” Oware said. “Filing amendments is going to compound the work at the IRS right now.”

What about the tax break for people with children that was in the American Rescue Plan?

The bill passed by Congress includes an extra $1,000 deduction for each child 17 and younger in a household for 2021. That means families with children in that age range would receive a total of $3,000 for each child, Oware said.

But it’s a 2021 break and can’t be claimed on this year’s tax returns, he said. However, the IRS is supposed to send families the money before April 15, 2021, although a timetable has not been set.

Has the tax deadline moved again this year?

Yes, the IRS announced Wednesday the federal tax deadline is May 17. The deadline for Colorado’s state taxes, however, is still April 15.

 

 

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