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Millions of Americans who received unemployment benefits last year received a new tax break from the US bailout plan.
This is how it works.
$ 10,200 tax break
Unemployment benefit is usually treated as income for tax purposes. The new tax break is an “exclusion” – workers exclude unemployment benefits of up to $ 10,200 from their 2020 taxable income.
Individuals should be provided with a Form 1099-G showing their Total Unemployment Benefit for the last year. The number is in field 1 on the tax form.
For married couples, each spouse can exclude up to $ 10,200 from their benefits. This would reduce couples’ joint taxable income by a maximum of $ 20,400.
Amounts in excess of $ 10,200 for each individual will continue to be taxable.
For example, suppose a married couple had a total income of $ 100,000. This income includes benefits of $ 20,000 for one spouse and $ 5,000 for the other spouse.
This pair is eligible for $ 15,200 tax exemption. (The first spouse only gets a break from $ 10,200 of the $ 20,000.) The couple would pay federal tax on $ 84,800 in income instead of the initial $ 100,000.
Who is Eligible?
Not everyone is entitled to the tax cut. Only those who made less than $ 150,000 in 2020 are eligible.
This income threshold acts as a cliff: Anyone who earned $ 150,000 or more in the last year will not get a tax break.
The cap of $ 150,000 is the same for all taxpayers regardless of filing status, e.g. B. single or married.
One fold: taxpayers must use all of their unemployment benefits to determine their eligibility for the tax break.
Let’s say a couple made a combined total of $ 140,000 in labor income last year. Each spouse also received $ 6,000 in unemployment benefits. Her total income would be $ 152,000, which would exclude her from the tax break.
Modified adjusted gross income
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The $ 150,000 income limit technically refers to a measure known as “modified adjusted gross income”.
MAGI is a number that the government uses to determine eligibility for some other tax breaks. (For example, a single applicant cannot deduct student loan interest this year if their MAGI is $ 85,000 or more.)
Taxpayers need to do a calculation to determine their MAGI in 2020.
The formula uses information from Form 1040 and Schedule 1.
The IRS describes the MAGI calculation (and how to apply for unemployment tax break) in online instructions posted on Friday. They are entitled “New Exclusion of Up to US $ 10,200 Unemployment Benefit”.
“I think it’s cool that they were able to adopt an existing form that allows people to be excluded,” said Janet Holtzblatt, senior fellow at the Urban-Brookings Tax Policy Center, of the IRS. “You didn’t have to come up with a new shape.
“It’s really very efficient.”
The IRS is working with online tax advisors to update the latest tax software so taxpayers can determine how to report their unemployment income on their 2020 tax returns, the agency said on Friday.
It seems that digital tax accountants need a little more time before their software can take into account the new rules.
“We are awaiting additional guidance from the IRS on implementing unemployment rules,” said Lisa Patterson, a spokeswoman for H&R Block.
TurboTax expects taxpayers to be notified of updates later this week, according to a spokeswoman.
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The IRS listed several other important notices to taxpayers regarding Form 1099-G.
States may issue separate 1099-Gs for state benefits and the additional $ 600 weekly CARES Act amendment paid through last July. In this case the two numbers should be added.
States can mail the forms or send them electronically. Workers should consult state unemployment benefit websites for more information.
If the amount listed in Box 1 on Form 1099-G is incorrect, the IRS says that you are only reporting the actual amount of Unemployment Benefit paid in 2020. This number would be listed on Appendix 1 (Form 1040), Line 7, Unemployment Allowance.
Additionally, workers who overpayed unemployment benefit in 2020 should subtract the amount repaid from the total amount received, according to the IRS. Enter the result on line 7. Also enter “Repayment” and the amount you paid back in the dotted line next to line 7.