On March 11, 2020, the World Health Organization declared that the COVID-19 outbreak was officially a pandemic as rates of infection rose significantly is the U.S. and across the world. On March 13, 2020, President Donald Trump declared a national emergency in the United States. Many states followed suit and issued a number of executive orders that closed down non-essential businesses, restricted travel and compelled many residents to stay in their home until the emergency passes. With many businesses having to shut down and lay off workers, there has been an unprecedented number of individuals filing for unemployment benefits in their respective states.
One year later, the COVID-19 pandemic rages on and a number of people continue to struggle despite several stimulus packages that were passed. On the first anniversary of the pandemic declaration, President Joe Biden signed into law the American Rescue Plan Act of 2021 that put a $1.9 trillion economic relief plan into force. As part of that package, taxpayers who earned unemployment compensation in 2020 will receive a tax deduction against income.
Effective for the 2020 tax year, the Internal Revenue Code is amended as follows:
- “In the case of any taxable year beginning in 2020, if the adjusted gross income of the taxpayer for such taxable year is less than $150,000, the gross income of such taxpayer shall not include so much of the unemployment compensation received by such taxpayer (or, in the case of a joint return, received by each spouse) as does not exceed $10,200.” Amended 26 U.S.C. §85(c)(1). For returns that are married filing jointly, up to $20,400 of unemployment compensation can be excluded.
Since the American Rescue Plan Act of 2021 was passed after the 2020 tax return filing season started, many Americans filed personal income tax returns without claiming the deduction. On March 31, 2021, the IRS released guidance in Notice 2021-71 asking taxpayers who already filed their returns to NOT file an amended return but to instead allow the IRS to automatically apply the deduction retroactively to the filed return.
Per the notice, the Internal Revenue Service directs as follows:
- “Because the change occurred after some people filed their taxes, the IRS will take steps in the spring and summer to make the appropriate change to their return, which may result in a refund. The first refunds are expected to be made in May and will continue into the summer.”
- “For those taxpayers who already have filed and figured their tax based on the full amount of unemployment compensation, the IRS will determine the correct taxable amount of unemployment compensation and tax. Any resulting overpayment of tax will be either refunded or applied to other outstanding taxes owed.”
- “For those who have already filed, the IRS will do these recalculations in two phases, starting with those taxpayers eligible for the up to $10,200 exclusion. The IRS will then adjust returns for those married filing jointly taxpayers who are eligible for the up to $20,400 exclusion and others with more complex returns.”
- “There is no need for taxpayers to file an amended return unless the calculations make the taxpayer newly eligible for additional federal credits and deductions not already included on the original tax return.”
You should ensure that you received a Form 1099-G from the state government and that the unemployment compensation amounts contained on it are correct, for the IRS will rely on this reporting when it automatically adjusts the filed tax returns. If the amounts are incorrect, you need to contact the state unemployment agency to have the amounts corrected immediately. If the prospect of dealing with the government directly appears daunting, you can employ the services of a skilled tax professional.
If you or a loved one have any questions about federal taxation or need legal representation, then do not hesitate to contact the experienced attorneys at Kershaw, Vititoe & Jedinak PLC for assistance today.
