If you file Form 1040-NR, you can’t claim the unemployment compensation exclusion for your spouse. If your modified AGI is $150,000 or more, you can’t exclude any unemployment compensation. Amounts over $10,200 for each individual are still taxable. If you are married, each spouse receiving unemployment compensation doesn’t have to pay tax on unemployment compensation of up to $10,200. If your modified adjusted gross income (AGI) is less than $150,000, the American Rescue Plan enacted on March 11, 2021, excludes from income up to $10,200 of unemployment compensation paid in 2020, which means you don’t have to pay tax on unemployment compensation of up to $10,200. The revised IRS notice and March 23 version of the Form 1040 instructions read as follows: Advisers will need to carefully review returns run under that software that determined the unemployment was taxable to determine if that remains correct under the March 23 worksheet. In the interim, many (but not all) tax software providers updated their product to calculate the exclusion, presumably using the original March 12 instructions. Originally the IRS instructions had taxpayers include the unemployment compensation in determining the modified AGI (reading “without regard to this section” in IRC §85(c)(2)(B) to mean without regard to the exclusion at IRC §85(c)) but now they have decided that means without regard to any unemployment compensation covered by §85. However, on Mathe IRS made a significant change in those instructions.
On March 12, 2021, the IRS provided updated instructions on their website for preparing returns that have excludable unemployment compensation.
#Irs 10200 unemployment tax break update how to
Now it turns out that, due to an IRS change of heart on how to read IRC §85(c)(2)(B), your software may now be subjecting unemployment to tax the IRS has now decided is not to be subject to such tax. As a tax adviser, you may have recently installed a tax software update to take into account the unemployment compensation exclusion for 2020 passed as part of the American Rescue Plan Act of 2021 and found at IRC §85(c).
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