2021 Unemployment Compensation: ARPA ACT

Americans who received unemployment benefits in 2020 can claim a special new tax break included in the $1.9 trillion American Rescue Plan Act enacted on March 11, 2021.

If modified adjusted gross income (AGI) is less than $150,000, the new law excludes from income, up to $10,200 of unemployment compensation paid in 2020.

• If you are married, each spouse receiving unemployment compensation doesn’t have to pay tax on unemployment compensation of up to $10,200
• Amounts over $10,200 for each individual are still taxable
• If modified AGI is $150,000 or more all unemployment compensation is taxable

For those taxpayers that have not yet filed their 2020 tax return, our software has been updated to reflect the changes to the Form 1040, Schedule 1 - Additional Income and Adjustments to Income. Returns filed prior to version US2021.25 did not receive this automatic exclusion. 

What If I Already Filed My Tax Return Prior To the Passage Of The ARPA?

The IRS has advised that taxpayers who filed and paid tax on the first $10,200 of their unemployment compensation, who qualified for the exclusion, will receive an automatic adjustment from the IRS. Taxpayers who have not received this adjustment should contact the IRS to see if an amendment is necessary.

Do States Honor The Exclusion?

Not all states honored the federal exclusion. Many states still required taxpayers pay tax on the full amount of unemployment compensation. Taxpayers should reference their state legislatures for more information.