The Senate approved a COVID relief bill on Saturday, with the House expected to approve the bill Tuesday this week. While the original House bill looked to extend additional unemployment aid of $400 per week until September, a last-minute change in order to secure West Virginia Senator Joe Manchin’s support decreased the benefit to $300 per week. But buried within the bill, there was also a tax benefit lurking for taxpayers who received unemployment income in 2020.
Section 9042 of the Senate bill allows for taxpayers who have an adjusted gross income (“AGI”) of $150,000 or less for the 2020 taxable year to exclude $10,200 from gross income, or in the case of a joint return up to $20,400 if each spouse received unemployment compensation.
For example, if a married filing joint couple had adjusted gross income of $110,000, including $20,000 unemployment benefits paid to both the husband and wife, they would be able to lower their adjusted gross income by $20,400 (10,200 x 2). This would cause the taxpayers adjusted gross income to decrease to $89,600 (110,000-20,400) and save the couple approximately $4,500 assuming a marginal tax rate of 22%. Not bad at all, but the benefit might just be beginning.
The married filing joint couples AGI after the unemployment adjustment also allow them to reap the benefit of the 2021 federal recovery rebate. Based on the Senate bill, the recovery rebate was still supported but the AGI limitations where a taxpayer would could not longer receive the rebate dropped significantly. While the Senate bill allows for a taxpayer recovery rebate of $1,400 ($2,800 in the case of a joint return) and an additional amount of $500 for each additional dependent, married filing joint taxpayers with an adjusted gross income of $100,000 or more are not eligible for the rebate. In our example above, by the taxpayers being able to exclude their 2020 unemployment compensation, they now also qualify for a 2021 recovery rebate of $2,800 even with no dependents. Head of household taxpayers must have an AGI below 75,000 before they are completely phased out of the rebate, and single taxpayers only can generate $50,000 of adjusted gross income before being losing the rebate in its entirety. The ability to exclude up to $10,200 of 2020 unemployment compensation could very well be what many taxpayers needed in order to navigate below the adjusted gross income thresholds to qualify for the recovery rebate.
So what now? The goal posts have changed again. Accountants are scratching their heads and are nervous concerning the turmoil this might cause for the recovery rebate and other AGI sensitive tax limitations for 2020 individual income tax returns that have already been filed with the IRS. If the bill passes this week, and there is potential for a taxpayer to exclude a portion of unemployment compensation, it will be important to file a 2020 amended tax return as soon as possible. The amendment will not only allow provide for a federal tax refund, but also secure potential additional stimulus benefits. You also might want to say a prayer for your tax accountant. Seriously, just when they thought they had finished a tax return it comes flying back in the door again. I guess it is to be expected in the months of COVID.
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If a taxpayer hasn’t filed their 2020 tax return, but could exclude unemployment compensation based on the pending legislation, they should evaluate their AGI reported in 2019 versus the expected AGI to be reported in 2020. If the 2020 AGI is lower than the recovery rebate thresholds discussed, it may lead a taxpayers to file their 2020 individual income tax return as soon as possible. If their 2019 AGI is lower than the recovery rebates discussed above, then the most advantageous route would be to extend 2020 and patiently wait for you recover rebate check. Stay tuned.