ARPA: Unemployment Partially Excluded from Income for Some Taxpayers

A little-reported provision of the American Rescue Plan Act of 2021 (ARPA) – Unemployment Benefits Received in 2020 May Be Partially Excluded from Income for Some Taxpayers

Many Americans found themselves collecting unemployment as the pandemic took hold in early 2020. Those taxpayers are now in the process of filing their income tax returns for 2020. An individual’s gross income normally includes unemployment compensation. This means any amount received under a law of the United States or of a state, which is “in the nature of unemployment compensation.” Unemployment compensation programs provide cash benefits on a regular basis to normally employed workers during limited periods of unemployment.

New law: ARPA

Under the American Rescue Plan Act (ARPA), signed on March 11th, there is an important retroactive change to how these benefits are taxed. For unemployment benefits received in 2020 only, if the adjusted gross income (AGI) of the taxpayer for the tax year is less than $150,000, (not including any unemployment benefits in that amount), the taxpayer can exclude up to $10,200 ($20,400 for married couples filing jointly) from their gross income when filing their taxes.

What This Means

The new law does not provide for a phase-out based on AGI. Therefore, if a taxpayer makes $150,000 or more, the exclusion does not apply, and all the individual’s unemployment compensation would be included in gross income.

The same $150,000 limit applies to taxpayers filing joint returns, as head of household, or with single status. But the $10,200 exclusion applies separately to each spouse.

Some taxpayers may have already filed their returns before ARPA passed. If you included unemployment compensation in your gross income, the IRS will automatically refund taxpayers who have already filed their tax returns starting in May of 2021. Taxpayers will not have to amend returns or do anything else for this change.

As with any new tax law, there are important details that could impact your personal tax situation. Please contact your tax advisors at HW&Co. if you have questions.

Editor’s Note: This article was originally published March 10, 2021, and has been updated for accuracy.