The New Exclusion of Unemployment Compensation Is Up to $10,200. Who’ll Get Affected?

By NATE GARTRELL On Dec 5, 2021

According to the IRS, for individuals with modified adjusted gross incomes (AGIs) of no more than $150,000, the American Rescue Plan, passed on March 11, 2021, exempts income up to $10,200 of unemployment compensation paid in 2020.

You are therefore not required to pay tax on unemployment compensation of up to $10,200.

For those married, couples are not required to pay taxes on unemployment compensation up to $10,200.

Meanwhile, it is important to know that income exceeding $10,200 per individual is taxed.

Moreso, if you have a modified AGI of $150,000 or more, unemployment benefits cannot be excluded.

Furthermore, in the event you file a Form 1040-NR, your spouse’s unemployment compensation cannot be excluded.

You must include the exclusion separately from the unemployment compensation.

To calculate your exclusion and how much to enter on Schedule 1, line 8, please see the updated instructions and the Unemployment Compensation Exclusion Worksheet.

When calculating for deductions or exclusions from income, when requested to input the amount from Schedule 1, line 7, input the total unemployment compensation listed on line 7, or when requested to input the amount from Schedule 1, line 8, input the sum listed on line 3 of the Unemployment Compensation Exclusion Worksheet.

You are not qualified for all of these deductions if you file Form 1040-NR. For more information, take a look at Form 1040-NR Instructions.

Taxable social security benefits (Instructions for Form 1040 or 1040-SR, Social Security Benefits Worksheet)
IRA deduction (Instructions for Form 1040 or 1040-SR, IRA Deduction Worksheet)
Student loan interest deduction (Instructions for Form 1040 or 1040-SR, Student Loan Interest Deduction Worksheet)
Nontaxable amount of Olympic or Paralympic medals and USOC prize money (Instructions for Form 1040 or 1040-SR, Schedule 1, line 8)
The exclusion of interest from Series EE and I U.S. Savings Bonds issued after 1989 (Form 8815)
The exclusion of employer-provided adoption benefits (Form 8839)
Tuition and fees deduction (Form 8917)
The deduction of up to $25,000 for active participation in a passive rental real estate activity (Form 8582)

An amended return should not be filed if your 2020 Form 1040 or 1040-SR has already been filed. When people file their tax returns and report unemployment compensation, the IRS will automatically refund them. For more details, see IRS Publication IR-21-71.

Line 7, Unemployment Compensation, of Schedule 1 (Form 1040), is updated below.

Line 7

Unemployment Compensation

In box 1, you should see the total unemployment compensation you will receive in 2020 on your Form 1099-G. This amount should be reported on line 7.

Attention: If the amount reported in box 1 of your Form(s) 1099-G is incorrect, report on line 7 only the actual amount of unemployment compensation paid to you in 2020.

Attention: When figuring any of the following deductions or exclusions, include the full amount of your unemployment benefits reported on Schedule 1, line 7 (unreduced by any exclusion amount): taxable social security benefits, IRA deduction, student loan interest deduction, nontaxable amount of Olympic or Paralympic medals and USOC prize money, the exclusion of interest from Series EE and I U.S. Savings Bonds issued after 1989, the exclusion of employer-provided adoption benefits, the tuition and fees deduction, and the deduction of up to $25,000 for active participation in a passive rental real estate activity. See the specific form or instructions for more information. If you file Form 1040-NR, you aren’t eligible for all of these deductions. See the Instructions for Form 1040-NR for details.

Important: If your modified adjusted 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 to you in 2020. For married taxpayers, you and your spouse can each exclude up to $10,200 of unemployment compensation. For example, you file jointly with your spouse and your modified AGI is less than $150,000. You were paid $20,000 of unemployment compensation and your spouse was paid $5,000. Report the $25,000 (the total amount of your unemployment compensation) on line 7 and report $15,200 on line 8 as a negative amount (in parentheses). The $15,200 excluded from income is all of the $5,000 unemployment compensation paid to your spouse, plus $10,200 of the $20,000 paid to you. If your modified AGI is $150,000 or more, you can’t exclude any unemployment compensation. Use the Unemployment Compensation Exclusion Worksheet to figure your modified AGI and the amount to exclude. If you file Form 1040-NR, you can’t exclude any unemployment compensation for your spouse.

When you don’t itemize deductions, you can reduce the amount you report on line 7 by the amount you contributed to a governmental unemployment compensation program or paid family leave program. Form 1099-G provides instructions that would be helpful if you are seeking to itemize deductions.

Attention: Separate Forms 1099-G may be issued by your state for state unemployment compensation and federal unemployment benefits as a result of the Coronavirus outbreak. Please, remember to enter all unemployment compensation on line 7.

If you were overpaid unemployment compensation in 2020, and then repaid any of the compensation in 2020, deduct the repaid amount from your total payment received. Whatever you get put it on line 7. In addition, remember to put in “Repaid” and your repayment amount on the dotted line next to line 7.

For those, in 2020, who were repaid over $3,000 of unemployment compensation which they reported in gross income the previous year, Visit Repayments in Pub. 525 to learn about reporting the payment.

Helpful Tip: You may receive an electronic Form 1099-G instead of a paper copy of it if you received unemployment compensation in 2020. Find out more at the unemployment compensation website of your state.

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Schedule 1, Line 8 of the Unemployment Compensation Exclusion Worksheet (Step-by-Step)

If you are filing Form 1040 or 1040-SR, enter the total of lines 1 through 7 of Form 1040 or 1040-SR. If you are filing Form 1040-NR, enter the total of lines 1a, 1b, and lines 2 through 7.
Enter the amount from Schedule 1, lines 1 through 6. Don’t include any amount of unemployment compensation from Schedule 1, line 7 on this line.
Use the line 8 instructions to determine the amount to include on Schedule 1, line 8, and enter here. Do not reduce this amount by the amount of unemployment compensation you may be able to exclude.
Add lines 1, 2, and 3.
If you are filing Form 1040 or 1040-SR, enter the amount from line 10c. If you are filing Form 1040-NR, enter the amount from line 10d.
Subtract line 5 from line 4. This is your modified adjusted gross income.
Is the amount on line 6 $150,000 or more?
a. [ ] Yes. Stop You can’t exclude any of your employment compensation
b. [ ] No. Go to line 8
Enter the amount of unemployment compensation paid to you in 2020. Don’t enter more than $10,200.
If married filing jointly, enters the amount of unemployment compensation paid to your spouse in 2020. Don’t enter more than $10,200. If you are filing Form 1040-NR, enter -0-.
Add lines 8 and 9 and enter the amount here. This is the amount of unemployment compensation excluded from your income.
Subtract line 10 from line 3 and enter the amount on Schedule 1, line 8. If the result is less than zero, enter it in parentheses. On the dotted line next to Schedule 1, line 8, enter “UCE” and show the amount of unemployment compensation exclusion in parentheses on dotted line. Complete the rest of Schedule 1 and Form 1040, 1040-SR, or 1040-NR.