Latest Stimulus Package Changes Tax Treatment of Unemployment Benefits Received in 2020 by Joanie B. Stein, CPA

Posted on April 07, 2021 by Joanie Stein

The American Rescue Plan (ARP), signed into law on March 11, 2021, allows eligible taxpayers to exclude from their 2020 taxable income up to $10,200 in unemployment benefits they received last year. This relief is subject to certain restrictions and limitations as well as further changes as the IRS continues to issue guidance.

Ordinarily, unemployment benefits are treated as taxable income that recipients must report on their federal and state income tax returns. The actual amount of unemployment compensation received and federal income tax withheld, if any, can be found on Form 1099-G, Certain Government Payments, issued by each state’s unemployment office. However, due to the COVID-19 pandemic, these are not ordinary times. In the past year, more than 23 million U.S.  workers filed for unemployment benefits and many continue to struggle through the new year.

Under the ARP, taxpayers with modified adjusted gross income (AGI) below $150,000 can exclude up to $10,200 of their individual jobless benefits from taxable income. Unemployment compensation above the excluded amount is taxable.

To determine whether they qualify for this relief, taxpayers should exclude from their AGI calculations the full amount of unemployment benefits they received last year. In an interesting departure from common tax regulations, the AGI limit is the same for individual filers and married couples filing jointly. However, for jointly filing married couples, each spouse may exclude up to $10,200 of their individual jobless benefits from their households’ taxable income, resulting in a $20,400 reduction in taxable income for the year. These exclusions apply only to taxpayers’ federal income taxes; taxpayers may need to report and pay state taxes on the unemployment compensation they received in 2020.

The IRS urges individuals who already filed their 2020 tax returns (before the enactment of the ARP) to refrain from filing amended returns at this time. Rather, the agency expects it will be able to adjust taxpayers’ taxable income automatically and process refunds, as needed. For those who have not yet filed and who may be taking advantage of the recently announced postponement of the federal tax filing deadline to May 17, 2021, meet with your tax advisors to determine your eligibility for this relief and to determine the exclusion amount you may report separate from unemployment compensation on your federal tax returns.

About the Author: Joanie B. Stein, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where she works with individuals and closely held businesses to implement sound strategies that are intended to preserve wealth and improve tax-efficiency. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at