IRS CHANGES HOW UNEMPLOYMENT INCOME IS TAXED
The IRS has changed the tax treatment of the New Exclusion of up to $10,200 of Unemployment Compensation guidance. Its original guidance included unemployment income in adjusted gross income when calculating the $150,000 modified adjusted gross income (MAGI) limitation. On March 23, 2021, the IRS updated its instructions for the unemployment compensation exclusion worksheet and now excludes unemployment compensation from MAGI.
This is important because up to $10,200 of unemployment compensation is excluded from income if MAGI is less than $150,000. But if MAGI is $150,000 or more, all unemployment compensation is taxed. The latest guidance widens the net of individuals qualifying for the exclusion. For example, if a taxpayer earned $140,000 in 2020 and collected $10,200 in unemployment compensation, he would have been over the $150,000 MAGI limit under the old rules and all his unemployment compensation would be taxable.
The guidance notes that if a 2020 Form 1040 has already been filed, there is no need to file an amended return to figure the amount that should have been excluded. The IRS will refigure the taxes using the excluded unemployment compensation amount and adjust the tax accordingly. The IRS will send any refund amount directly to the taxpayer.
For help with any of your tax-related questions or needs, please contact the tax experts at Cantrell & Cantrell, one of Houston’s premier tax-focused law firms.