The following explains how the $ 10,200 unemployment tax reduction works

Millions of Americans who received unemployment benefits last year got a new tax cut from the American Rescue Plan.

This is how it works.

Unemployment benefits are generally considered income for tax purposes. The new tax cut is an “exclusion”: workers exclude up to $ 10,200 in unemployment benefits from their 2020 taxable income.

People should receive a Form 1099-G showing their full unemployment compensation last year. The number is in box 1 of the tax form.

For married couples, each spouse can exclude up to $ 10,200 from their benefits. This would reduce the couples ’joint taxable income by a maximum of $ 20,400.

Amounts in excess of $ 10,200 for each person remain taxable.

For example, suppose a married couple had a combined income of $ 100,000. This income includes $ 20,000 in benefits for one spouse and $ 5,000 for the other.

This couple can exclude $ 15,200 from taxes. (The first spouse only gets a break of $ 10,200 out of $ 20,000.) The couple would pay federal taxes for $ 84,800 in income instead of the initial $ 100,000.

Not everyone meets the requirements for tax cuts. Only people who earned less than $ 150,000 in 2020 are eligible.

This income threshold works like a cliff – anyone who earned $ 150,000 or more last year doesn’t get any tax credits.

The $ 150,000 ceiling is the same for all taxpayers, regardless of filing status, such as single or married.

One wrinkle: Taxpayers must use their total unemployment benefits received when determining their income eligibility for the tax credit.

Let’s say a couple earned $ 140,000 in combined labor income last year. Each spouse also earned $ 6,000 in unemployment benefits. Their total income would be $ 152,000, which would disqualify them from the tax credit.

The $ 150,000 income limit technically refers to a measure known as “modified adjusted gross income”.

MAGI is a number that the government uses to determine eligibility for other tax credits. (For example, an applicant cannot deduct student loan interest this year if their MAGI is $ 85,000 or more).

Taxpayers will need to make a calculation to determine their MAGI by 2020.

The formula uses information from Form 1040 and List 1.

The IRS details the MAGI calculation (and how to claim unemployment tax relief) in online instructions released Friday. It’s titled “New Exclusion of Up to $ 10,200 Unemployment Compensation.”

“I think the most interesting thing is that they were able to adopt an existing form that allows people to get the exclusion,” Janet Holtzblatt, senior member of the Urban-Brookings Fiscal Policy Center, said of the IRS. “They did not have to submit a new form.

“That’s really very efficient.”

The IRS is working with online tax preparers to update current tax software so taxpayers can determine how to report their unemployment income on the 2020 tax return, the agency said Friday.

It seems that digital tax preparers need a little more time before their software can take the new rules into account.

“We expect additional guidance from the IRS on how unemployment exclusion will be implemented,” said Lisa Patterson, a spokeswoman for H&R Block.

TurboTax expects updates to be available to taxpayers later this week, according to spokeswoman Dominique Koudsi.

The IRS listed some other important notes for taxpayers on Form 1099-G.

States can issue separate 1099-G for statewide benefits and the additional $ 600 weekly CARES Act supplement paid until July of last year. If so, the two numbers must be added together.

Statements can email forms or submit them electronically. Workers should consult the states’ unemployment compensation websites for more information.

If the amount listed in Box 1 of Form 1099-G is incorrect, please report only the actual amount of unemployment benefit paid in 2020, according to the IRS. This number would go to Appendix 1 (Form 1040), line 7, Unemployment Compensation.

In addition, workers who paid an overpayment of unemployment benefits in 2020 should deduct the amortized amount from the total amount received, the IRS said. Enter the result on line 7. Also enter “Repayed” and the amount you paid on the dotted line next to line 7.