The IRS recently distributed ARPA guidance related to the unemployment compensation exclusion. It affects taxpayers whether a return has been filed or not, and this is a new unemployment compensation exclusion worksheet to consider.
Under normal circumstances, unemployment compensation should be included in the taxpayer’s total income. However, the 2021 ARPA allows the first $10,200 of unemployment compensation to be excluded.
It will apply only if 2020 modified adjusted gross income is less than $150,000. If a joint return is filed, each spouse will have the $10,200 exclusion, but if the amounts are higher, each would be subject to tax.
What about taxpayers who have already filed?
ARPA was passed into law in March after many taxpayers filed their tax returns. For this reason, it creates an issue as to whether the taxpayer must file an amended return accounting for the new unemployment compensation exclusion.
However, the IRS has encouraged taxpayers not to file amended returns because of the advantages of the exclusion. It is because taxes will be recalculated, and the amount of each taxpayer’s account will be adjusted. Thus, the IRS will send any refunded amount directly to each taxpayer.
What happens to those who have not yet filed their return?
Unemployment compensation will have to be reported separately for those who have not filed a tax return. To that end, the IRS has directed that these exclusions be reported as a deduction on Form 1040, Schedule 1, Part 1, line 8, the section titled “Other Income.”
Those who received unemployment compensation will be required to obtain a Form 1099-G, showing the total unemployment compensation paid during the year. This amount should be reported on Form 1040 but line 7.
You should note that some states issue separate forms for unemployment compensation received from the state. The additional $600 per week of coronavirus relief are amounts to be added to this income.
Deductions and exclusions are to be calculated for line 7 of the form.
It is important to consider that, in calculating line 7 of the form, you must take different types of income into account, such as:
- Taxable social security benefits.
- IRA deduction.
- Deduction for student loan interest.
- Non-taxable amount of Olympic or Paralympic medals and USOC cash awards.
- Interest on Series EE and I United States Savings Bonds issued after 1989.
- Exclusion of employer-provided adoption benefits.
- Tuition and fees deduction.
- Deduction of up to $25,000 for active participation in a passive rental real estate activity.
Those who have made contributions to a government unemployment compensation program or government-paid family leave may reduce the amount reported. It is provided that no deductions are being itemized. Likewise, if a taxpayer received an overpayment of compensation and repaid it during that year, this amount should be subtracted from the total.
To this end, the IRS created a new unemployment compensation worksheet, the Unemployment Compensation Exclusion Worksheet. It is so taxpayers can calculate their modified gross income and the exclusion amount.
How to use the Unemployment Compensation Exclusion Spreadsheet?
Some parameters must be considered to using the Unemployment Compensation Exclusion Spreadsheet. Among those are:
- If filing Form 1040 or 1040-SR, you must place the total on lines 1 through 7. However, for Form 1040-NR, you must enter the capacity on lines 1a, 1b, and 2 through 7.
- No unemployment compensation amount should be included in Schedule 1, line 7.
- The instructions for completing line 8 of the form should be followed without reducing the amount of unemployment compensation you may exclude.
- For Form 1040 or 1040-SR, the amount should be entered on line 10c, while for 1040NR, the amount should be entered on line 10d.
- It is important to subtract line 5 from line 4, which will result in the modified adjusted gross income.
- Nothing can be excluded if the amount on line 6 is more than $150,000. Otherwise, you can go to line 8.
- No more than $10,200 may be entered for unemployment compensation.
- Lines 8 and 9 must be added together and the amount entered here.
- Finally, subtract line 10 from line 3 and enter the amount on Schedule 1. If the number is less than zero, it should be entered in parentheses.
By following these recommendations, you can perform the whole tax exclusion process in a much more efficient and simple way.