The Tax Cuts and Jobs Act of 2017 (TCJA) modified Section 85 of the Internal Revenue Code (IRC), which addresses unemployment compensation. Prior to the TCJA, unemployment compensation was excluded from federal income taxation. However, the TCJA eliminated this exclusion for tax years beginning after December 31, 2017.
This change has significant implications for individuals receiving unemployment benefits. Previously, these benefits were not subject to federal income tax, providing a financial cushion during periods of job loss. However, under the TCJA, unemployment compensation is now considered taxable income, resulting in a reduction in the net amount of benefits received by individuals.
The TCJA’s elimination of the unemployment exclusion has drawn criticism from some quarters, who argue that it unfairly burdens individuals who are already facing financial hardship due to job loss. Advocates for the unemployed have called for the restoration of the exclusion to provide relief to those who rely on unemployment benefits to make ends meet.
The IRS has issued guidance on the taxation of unemployment compensation under the TCJA. According to the IRS, unemployment compensation is generally taxable as ordinary income and should be reported on Form 1040, U.S. Individual Income Tax Return. Individuals may be eligible for certain deductions and credits that can reduce their tax liability, such as the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC).
The elimination of the unemployment exclusion is a complex issue with far-reaching implications for individuals receiving unemployment benefits. It is important for taxpayers to understand the changes under the TCJA and consult with a tax professional if necessary to ensure proper tax compliance and maximize their tax savings.
Updates for 2023 Tax Year
The American Rescue Plan Act of 2021 included a provision that made the first $10,200 of unemployment benefits received in 2020 non-taxable. This provision was not extended to 2022, and as a result, all unemployment benefits received in 2022 are fully taxable.
TurboTax has updated its software to reflect this change, and users will need to make sure that they are using the most recent version of the software in order to file their taxes accurately.
If you received unemployment benefits in 2022, you will be able to enter the total amount you received on your tax return, and TurboTax will automatically calculate the amount of tax you owe.
Here are some additional things to keep in mind when filing your taxes with TurboTax:
- If you received unemployment benefits in 2020 and 2022, you will need to file a separate tax return for each year.
- If you received unemployment benefits from more than one state, you will need to include the total amount of benefits received from all states on your tax return.
- You may be eligible for a refund of taxes you paid on unemployment benefits received in 2020.
If you have any questions about how to file your taxes with TurboTax, you can visit the TurboTax website or speak to a tax professional.
Tax Table
The following table shows the federal income tax rates for 2023.
| Filing Status | Taxable Income | Tax Rate |
|---|---|---|
| Single | $0 – $10,275 | 10% |
| Single | $10,276 – $41,775 | 12% |
| Single | $41,776 – $89,075 | 22% |
| Single | $89,076 – $170,500 | 24% |
| Single | $170,501 – $215,950 | 32% |
| Single | $215,951 – $539,900 | 35% |
| Single | $539,901+ | 37% |
TurboTax and the Unemployment Exclusion
The American Rescue Plan Act of 2021 included a provision that excluded up to $10,200 of unemployment benefits from federal income tax for the 2020 tax year. This exclusion was intended to provide relief to individuals who had lost income due to the COVID-19 pandemic.
TurboTax has updated its software to reflect this change. If you received unemployment benefits in 2020, you will need to enter the amount of those benefits on your tax return. TurboTax will then automatically calculate the exclusion and adjust your taxable income accordingly.
Eligibility and Qualification Guidelines
To be eligible for the unemployment exclusion, you must meet the following requirements:
- You must have received unemployment benefits in 2020.
- Your modified adjusted gross income (MAGI) must be less than $150,000 for single filers or $200,000 for married couples filing jointly.
- You cannot be claimed as a dependent on someone else’s tax return.
If you meet all of the above requirements, you are eligible for the unemployment exclusion. The amount of the exclusion is up to $10,200, but it may be reduced if your MAGI exceeds certain thresholds.
| Filing Status | Phase-Out Begins | Full Phase-Out |
|---|---|---|
| Single | $150,000 | $200,000 |
| Married Filing Jointly | $200,000 | $250,000 |
| Married Filing Separately | $0 | $0 |
| Head of Household | $150,000 | $200,000 |
For example, if you are single and your MAGI is $160,000, your unemployment exclusion will be reduced by $100. This is because your MAGI is $10,000 over the phase-out threshold of $150,000.
The unemployment exclusion is a valuable tax break for individuals who received unemployment benefits in 2020. If you are eligible for the exclusion, be sure to claim it on your tax return.
Tax Calculations and Refund Implications
The American Rescue Plan Act of 2021 included a provision that excluded up to $10,200 of unemployment benefits received in 2020 from federal income taxes. This exclusion applies to individuals with adjusted gross income (AGI) below certain thresholds:
- Single filers: $150,000
- Married filing jointly: $200,000
- Head of household: $150,000
If you received unemployment benefits in 2020 and meet the income requirements, you may be eligible for a refund if you already filed your tax return without claiming the exclusion. Note that states may have different rules regarding unemployment benefits, so it’s important to check with your state tax agency.
To claim the unemployment exclusion, you will need to amend your 2020 tax return using Form 1040-X. You can download the form and instructions from the IRS website.
Here is a table summarizing the refund implications of the unemployment exclusion:
| AGI | Refund |
|---|---|
| $20,000 | Up to $10,200 |
| $50,000 | Up to $7,650 |
| $100,000 | Up to $2,550 |
| $150,000 | $0 |
Potential Impact on State Tax Returns
The American Rescue Plan Act of 2021 excluded up to $10,200 of unemployment compensation from federal taxation for individuals with modified adjusted gross income (MAGI) below certain thresholds. However, many states have not yet conformed to this federal exclusion, which could result in taxpayers owing state income tax on their unemployment benefits.
- Taxable Unemployment Benefits: In states that have not conformed to the federal exclusion, unemployment benefits received in 2020 may be subject to state income tax.
- Additional Tax Liability: Taxpayers who received unemployment benefits in 2020 may face an additional tax liability if their state has not conformed to the federal exclusion.
The table below provides a list of states that have conformed, partially conformed, or not yet conformed to the federal unemployment exclusion:
| State | Conformity Status |
|---|---|
| Alabama | Not Conformed |
| Alaska | Not Conformed |
| Arizona | Fully Conformed |
| Arkansas | Partially Conformed |
Taxpayers should consult their state tax agency for specific guidance on the treatment of unemployment benefits in their state.
Thanks for hanging with me on this TurboTax rollercoaster, folks! I’ll keep an eye on any other tax updates, so make sure to swing by again to see if there’s anything else I can help you with. Until then, stay informed and crush that tax season like a boss!