Tax Break for Unemployment Compensation
A surprise tax break for the unemployed is welcome news for the millions of Americans who were laid off in 2020 because of the pandemic. However, the details of how you can claim this tax break and how it will be implemented are still being ironed out.
Unemployment compensation has been a financial life saver for millions of Americans during the pandemic. An expanded unemployment compensation benefits package contained in several new pieces of legislation in 2020 also meant more money if you were laid off.
But there’s always been a Catch 22 with unemployment compensation. It’s a wonderful safety net if you’ve lost a job, but it’s also classified as taxable income that has to be reported on your tax return.
The recently passed American Rescue Plan partially fixed this problem. The first $10,200 of unemployment compensation you received in 2020 is now tax free thanks to the new legislation. Depending on your tax bracket, this tax break could mean $1,200 or more in taxes saved on your 2020 return.
While this tax break is indeed good news if you received unemployment compensation in 2020, this new legislation which contains the tax break didn’t become law until March after millions of Americans had already filed their 2020 tax return.
This legislation is also so new that the IRS hasn’t even had time yet to figure out how this tax break will be reported on your 2020 tax return.
"We recognize the challenges of implementing this change in tax law during filing season, particularly as millions of Americans have already filed their tax returns for 2020," several federal lawmakers wrote in a letter sent to Treasury Secretary Janet Yellen and IRS Commissioner Charles Rettig. "This underscores the need for Treasury and the IRS to take every action to ensure that all eligible individuals, including those who have already filed their 2020 tax return, are aware of and able to receive this critical relief."
If you received unemployment compensation in 2020, here’s what you need to do to claim this tax break on your 2020 tax return.
If you’ve already filed your 2020 tax return: Wait for further instruction from our office. Lawmakers are currently asking the IRS if it’s possible to automatically make adjustments and issue a refund if you’ve already filed your 2020 return. Issuing an automatic refund will also avoid the need to file an amended tax return.
If you HAVE NOT filed your 2020 tax return: Wait for further instruction from our office. It’s unclear when the IRS will issue guidance on how to claim your tax break. We’ll let you know what the next steps are as soon as we get notification from the IRS regarding how to claim the tax break.