The IRS has stated that they will adjust federal returns that were filed before the American Rescue Plan Act of 2021 was enacted on March 11 that included unemployment benefits or reported an excess Premium Tax Credit repayment on Form 1040, Schedule 2, line 2.
Below are details on how and when the IRS will adjust the affected returns that have already been filed and a reminder of how they should be reported on returns still to be filed this filing season (Tax Year 2020).
Unemployment Compensation Exclusion
The first $10,200 of unemployment compensation received in 2020 is nontaxable if the taxpayer’s modified adjusted gross income (regardless of filing status) is under $150,000.
For married filing joint filers this provision applies to both the taxpayer and the spouse. Therefore, if both the taxpayer and spouse received unemployment benefits, the first $10,200 would be nontaxable for each of them.
Returns Filed Before Exclusion Became Law
For federal returns that included unemployment compensation that were filed before the American Rescue Plan was enacted, the IRS will adjust the return for the exclusion and recalculate the return based on this change.
The IRS will do these recalculations in two phases beginning in May and continuing into the summer:
- Phase 1 – Simpler returns for filing statuses other than Married Filing Joint
- Phase 2 – Married Filing Joint returns and more complex returns
The taxpayer does not need to file an amended return unless the taxpayer became eligible for additional credits and deductions because the taxpayer’s adjusted gross income was reduced by the unemployment compensation exclusion.
For more details, see the 2020 Unemployment Compensation Exclusion FAQs – Topic D: Amended Return on the IRS website.
Unemployment Exclusion and States
For details on the taxability of unemployment income and how each State will handle tax returns that were filed before the enactment of the American Rescue Plan Act, see the States 1040 Unemployment Income Exemption Decisions page on the CrossLink Professional Tax Solutions website.
Returns Not Yet Filed
For 2020 federal returns that are filed for the rest of the 2021 filing season, the unemployment compensation exclusion of up to $10,200 will be reported on Form 1040, Schedule 1, line 8 (Other income) as a negative amount and include “UCE” on the dotted line next to line 8.
For more details, see the 2020 Unemployment Compensation Exclusion FAQs – Topic C: Claiming the Exclusion (Before Filing) on the IRS website.
Additionally, see the following on the IRS website:
- 2020 Unemployment Compensation Exclusion FAQs – covers topics such as:
- Claiming the exclusion before filing
- What the IRS will do for tax returns already filed and if an amended return has been filed for the exclusion
- Details on notice the IRS will send the taxpayer
- Impact of exclusion on income, credits and deductions
- Calculating the exclusion
- IRS News Release IR-21-71 – IRS to recalculate taxes on unemployment benefits
- IRS Post Release Change Article – New Exclusion of up to $10,200 of Unemployment Compensation
- Tax Treatment of Unemployment Benefits
Premium Tax Credit – Excess Advance Payments for 2020
Included in the American Rescue Plan Act was a provision that suspends the requirement for a taxpayer to pay back any excess Premium Tax Credit they received during 2020.
Returns Filed Before New Provision Became Law
For returns filed before the enactment of the American Rescue Plan Act that reported an additional tax on Form 1040, Schedule 2, line 2, the IRS will adjust the return by reducing the excess advance Premium Tax Credit repayment amount to zero and will reimburse that amount to the taxpayer.
Returns Not Yet Filed
All returns that were filed at the beginning of April and are still to be filed should calculate Form 1040, Schedule 2, line 2 – Excess advance premium tax credit repayment to zero and the Form 8962 (Premium Tax Credit) should not be attached to the return. The IRS should not be sending letters to taxpayers for a missing Form 8962 (Premium Tax Credit) in this situation. If the taxpayer does receive a letter they should disregard it.
For more details, see the following on the IRS website:
- IRS News Release IR-2021-84 (IRS suspends requirement of repay excess advance payments of 2020 Premium Tax Credit)
- IRS Post Release Changes to Forms Article – Suspension of Repayment of Excess Advance Payment of the PTC
