Unemployment Benefits and Your 2020 Tax Return - Why You May Want to Wait to File

Under the new stimulus package that was just signed into law, if you received unemployment benefits last year then the first $10,200 is not taxable for federal purposes

(unemployment has always been tax on your federal return, but not on your state return).  The tax-free provision is for households with an adjusted gross income under $150,000. If you're married, you and your spouse can each exclude up to $10,200 of unemployment compensation

How do you claim it? 

The IRS doesn't have an answer for everyone yet.  How to handle the new tax break depends on whether or not you already filed your 2020 tax return.  The IRS is working with tax software companies to update their products so that users will be able to claim the exemption on their 2020 tax returns. If you received unemployment compensation last year, you might want to wait a little bit longer before using one of these software products to complete your 2020 return. That will give the software provider time to make the necessary adjustments.

As of March 18, 2021, the IRS extended the filing deadline to May 17th, which includes both your return and any balance that may be due. While no information has been given about Virginia extending their deadline past May 1st, there’s good reason to believe they will also delay until at least May 17th and potentially June 1st, so delaying your filing won’t cause you to have to file an extension or pay a penalty.

If you have already filed your 2020 tax return, it may be a little more complicated. The knee-jerk reaction for many people is to file an amended return to claim the unemployment tax exemption. However, the IRS expressly stated that you "should not file an amended return at this time, until the IRS issues additional guidance." So, again, you should wait before taking any action to claim the new $10,200 tax break for unemployment benefits.

What might that "additional guidance" be? It could just be special instructions related to the filing of an amended return. However, another possible option is having the IRS automatically adjust the reported taxable income and issue refunds to people who already filed their 2020 tax return and reported unemployment compensation.

Editorial Opinion: What a mess! If you need help navigating this complicated tax year, please reach out – I’d be happy to help you figure out the best approach for your return.