Tax Treatment of Unemployment Benefits

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The federal American Rescue Plan Act signed by President Biden in March 2021 provides that up to $10,200 of state unemployment benefits received by individuals during 2020 are excluded from gross income. Taxpayers are eligible for the exclusion only if federal adjusted gross income is less than $150,000.

The mid-March legislation created some initial confusion regarding filing 2020 individual tax returns, particularly for those individuals that had previously filed their returns. The IRS ultimately advised taxpayers that had previously filed a return that an amended return was not required, rather, the IRS will process previously filed returns and issue tax refunds resulting from the exclusion from gross income.

Those individuals who still need to file their 2020 tax returns by the extended May 17, 2021 due date should report their unemployment benefits on Schedule 1, line 7 of Form 1040, and claim the excludable benefits, up to $10,200, as a subtraction on Schedule 1, line 8.

The Michigan Department of Treasury recently issued guidance for individuals filing Michigan tax returns, essentially following federal tax law. The Department has not yet issued guidance for individuals that already filed before the new law. Michigan is coordinating with the IRS to determine whether a Michigan return can be processed and a refund issued without the need for an amended Michigan return.

The laws of other states may vary on the treatment of these issues.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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