Throughout 2020, tens of millions drew on state run unemployment programs due to the effects of the pandemic on the economy. Typically, unemployment benefits are taxable to the recipient – yet mass confusion regarding tax withholdings on these benefits was bound to create surprise tax liabilities come tax filing season. The American Rescue Plan Act (“ARPA”) will allow for tax relief on unemployment benefits from 2020. In our typical FAQ/MKS commentary format, the following information below should address some immediate questions.
Is it true that unemployment benefits received in 2020 are tax free?
MKS: Yes, but only if your modified adjusted gross income (“MAGI”) is below $150,000 in 2020. If so, each individual will not be subject to the first $10,200 of unemployment benefits received during 2020. Why do we say “each” individual? If you file a joint return, each spouse may exclude up to $10,200, providing a total benefit of $20,400 of tax free unemployment benefits.
We find it interesting that the $150,000 MAGI threshold does not appear to differentiate between individual and joint filers. Barring new guidance from the IRS, those filing individual returns will benefit immensely from this provision.
I already filed my 2020 tax return. Can I still benefit from the law change?
MKS: Yes. The IRS issued a statement on March 10th “strongly urging taxpayers to not file amended returns related to the new legislative provisions or take other unnecessary steps at this time.” Clearly, there is not a process in place at this time to retroactively fix any filed 2020 returns. However, we have been told that information will be forthcoming on how this will be handled, so we urge patience for those asking to amend returns immediately at this time to avoid confusion and the cost of amending your filing.
Our hope (and best guess) is the IRS will automatically adjust tax liabilities or issue refunds once they have the chance to update this rule change in their system.
Are 2020 unemployment benefits still taxable at the state level?
MKS: Yes, for now. Another reason to be patient if you are itching to file your 2020 return with unemployment income reported. Ongoing discussions in the Minnesota legislature are being held to potentially conform to the federal treatment of unemployment benefits in 2020.
Stay tuned for additional information from our dedicated consulting team, who is following these developments at both the national and state levels. If an amended return is required, rest assured that your MKS professional will reach out to you.
I am currently unemployed – has anything changed for me?
MKS: Yes. The ARPA extends the Pandemic Unemployment Assistance through September 6th, 2021. If eligible under state requirements, applicants will receive an additional federal enhancement of $300 per week on top of the state benefits.
For residents of Minnesota, please visit the state unemployment website for up to date information. Minnesota continues to be a national leader in regards to clear guidance and swift implementation of federal law changes.