Tax Tips: Taxability of Unemployment Compensation

Tax law is constantly changing. Whether it is changing amounts of deductions to index those items for inflation (i.e. – the standard deduction) or sweeping tax law changes that radically affect numerous items, your tax return may vary from year to year. Some changes are permanent, and some are temporary.
One such temporary change to an item that you may have noticed is the taxability of unemployment compensation. Due to The American Rescue Plan Act of 2021, taxpayers that received unemployment compensation in 2020 enjoyed the benefit of the first $10,200 of unemployment compensation per person being excluded from income. To qualify for the exclusion, your 2020 adjusted gross income (AGI) needed to be less than $150,000. This threshold amount was the same for all returns, regardless of filing status. The Act was signed into law on March 11, 2021, midway through the tax season, and was made retroactive back to January 1 of 2020. Taxpayers that had already claimed their unemployment compensation as fully taxable were instructed by the IRS to do nothing as they would implement the change and refund any money due.
This was a one-year exclusion only. So, for 2021, we are back to unemployment compensation being fully taxable, as it had been in years prior to 2020. To offset the tax on unemployment compensation, you may elect to have federal withholding taken out of your unemployment checks and sent to the IRS as a prepayment of your taxes. You then get credit for that withholding on your tax return when you file.
Consult with your tax professional at Ketel Thorstenson about this or other tax matters because each situation is different. Don’t navigate the difficult and ever-changing tax codes and legislation on your own. Ketel Thorstenson CPAs and tax professionals receive advanced training and continuing education all year long to keep our service on the forefront of the tax industry. Call us today for guidance on tax planning, tax return preparation, and tax legislation affects or questions.