IRS Ruling Means That More People Will Be Eligible For Tax-Free Unemployment Compensation And Stimulus Checks!

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Congress passed a 3rd round of COVID stimulus funds 2 weeks ago, which I wrote about here.

It included child tax credits based on 2021 income and stimulus checks based on 2019 or 2020 income.

It also said that up to $10,200 per worker in unemployment compensation won’t be taxable and won’t count towards adjusted gross income (AGI) for households making less than $150,000.

But, would the $10,200 be counted or excluded from the $150,000 AGI cap?

The IRS has now given a very generous ruling that all unemployment compensation is excluded from your modified AGI when determining if you are below the $150,000 cap! In other words you take your modified AGI and subtract all unemployment compensation to determine if you qualify. If that number is below $150,000 you can exclude up to $10,200 per worker in unemployment compensation from their taxable income.

I’m not an accountant, so I may get some of the terminology wrong, but let’s give several examples to illustrate what this means for people on the edge cases of qualifying for this benefit:

  • Scenario 1:
    • Couple made $170,399 AGI including $20K/spouse in unemployment compensation
    • Unemployment compensation test: $170,399 AGI-$40,000 unemployment compensation=$130,399. As this is under $150,000, the couple qualifies for $20,400 in unemployment compensation being non-taxable.
    • Stimulus test: $170,399 AGI-$20,400 qualified unemployment compensation=$149,999 taxable income. As this is under $150,000, the couple qualifies for the full $1,400 stimulus check for each adult and child.
  • Scenario 2:
    • Couple made $165,200 AGI including $30K in unemployment compensation for one spouse only.
    • Unemployment compensation test: $165,200 AGI-$30,000 unemployment compensation=$135,200. As this is under $150,000, the couple qualifies for $10,200 in unemployment compensation being non-taxable.
    • Stimulus test: $165,200 AGI-$10,200 qualified unemployment compensation=$155,000 taxable income. As this is between $150,000 and $160,000, the couple qualifies for a stimulus check of $700 for each adult and child after a 50% phaseout due to $5,000 of taxable income over $150,000.
  • Scenario 3:
    • Couple made $170,399 AGI including $40K in unemployment compensation for one spouse only.
    • Unemployment compensation test: $170,399 AGI-$40,000 unemployment compensation=$130,399. As this is under $150,000, the couple qualifies for $10,200 in unemployment compensation being non-taxable.
    • Stimulus test: $170,399 AGI-$10,200 qualified unemployment compensation=$160,199 taxable income. As this is over $160,000, the couple does not qualify for any stimulus check.
  • Scenario 4:
    • Couple made $181,399 AGI including $20K/spouse in unemployment compensation
    • Unemployment compensation test: $181,399 AGI-$40,000 unemployment compensation=$141,399. As this is under $150,000, the couple qualifies for $20,400 in unemployment compensation being non-taxable.
    • Stimulus test: $181,399 AGI-$20,400 qualified unemployment compensation=$160,999 taxable income. As this is over $160,000, the couple does not qualify for any stimulus check.
  • Scenario 5:
    • Couple made $181,399 AGI including $5K in unemployment compensation for Spouse A and $15K in unemployment compensation for Spouse B.
    • Unemployment compensation test: $181,399 AGI-$20,000 unemployment compensation=$161,399. As this is over $150,000, the couple does not qualify for non-taxable unemployment compensation.
    • Stimulus test: $181,399 AGI-$0 qualified unemployment compensation=$181,399 taxable income. As this is over $160,000, the couple does not qualify for any stimulus check.
  • Scenario 6:
    • Couple made $190,399 AGI including $20K/spouse in unemployment compensation
    • Unemployment compensation test: $190,399 AGI-$40,000 unemployment compensation=$150,399. As this is over $150,000, the couple does not qualify for non-taxable unemployment compensation.
    • Stimulus test: $190,399 AGI-$0 qualified unemployment compensation=$190,399 taxable income. As this is over $160,000, the couple does not qualify for any stimulus check.

Will this announcement make you eligible for non taxable unemployment compensation or a higher stimulus check?

HT: cgr, via DDF

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35 Comments On "IRS Ruling Means That More People Will Be Eligible For Tax-Free Unemployment Compensation And Stimulus Checks!"

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Yankel

So what does this mean if I filed already and wasn’t eligible for stimulus, but my adjusted AGI would be? Do they automatically adjust it?

A

Oh, how I wish any of these scenarios would actually apply to me…

Barry

My terminology was that unemployment doesn’t count towards your AGI only to see if u qualify for the 10,200 deductible.

But for stimulus and other calculations,
They will still include your unemployment in excess of $10,200 towards your AGI as its still taxable.

Pls advise.
Thanks

Tova

Would this continue to apply for PUC that only arrived in 2021 due to glitches in the system?

S

Unless they extend these rulings at some point to 2021, I very much doubt it, as it’ll go by the 10-99 which will reflect based on when you get paid (other tax issues could potentially arise with income being pushed off a year).
It is crazy that those already dealing with system errors and issues getting their money on time, should have to also lose out on tons of benefits. However, I don’t see any way that they could calculate who dealt with system issues and who didn’t. Best bet is to hope they extend some of these rules into 2021.

CtownBin

It’s true that it doesn’t seem fair for system issues to make the difference. Having said that, it probably doesn’t make a huge difference for most people, as most people dealing with those issues probably hit the cap of $10,200 anyways so due to the cap it won’t matter.

S

Why would you say that?
I know loads of people that haven’t yet seen a dime from unemployment, but should (hopefully) receive it all retroactively this year.

CtownBin

They’ve been waiting over a year to get the money?? Wow, I didn’t know there were a lot of people like that.
Let’s hope they continue this benefit for 2021, I would think they would but you never know. Manchin really didn’t like it.

S

Some, like you said, just didn’t receive the proper amount, but there are definitely many people that haven’t had their claim paid out at all. Doesn’t necessarily have to have been a year, as their claim could’ve been in November, for example.

Ya, I’m not a fan of the rule altogether, but for fairness sake, I think they should extend it for 2021.

Harry

Thanks! Very informative

Does anyone know if other business losses can offset unemployment income?

Shmilfke

Hard cutoffs are the absolute stupidest thing ever.
You make $150,000+$1 and you pay $10,000 for that 1 extra dollar

Shmobaum

So what would you suggest? There’s gonna have to be a limit and automatically a $1 above that limit will put you in the higher bracket…

CtownBin

What do you mean- every single other tax-related benefit has a phaseout, not a cliff- most often at a rate of 5% (like the stimulus checks last time, the child tax credit, etc). So every $1 above the income cap costs you 5 cents of the benefit, until it eventually disappears completely. Here they could have used the 22% bracket as an approximate measure of what the benefit is worth, so with every $100 of income you could lose the ability to deduct $27 of unemployment compensation (worth about $5). Pretty simple actually, if it weren’t the middle of the night when they did this 🙂

CtownBin

Hard cutoffs defy all sense of logic. The stimulus cutoff this time isn’t much better, marginal tax rate is still over 100% with anyone with 3 kids or more. This is what happens when you’re negotiating this one issue for 12 hours in the middle of a Friday night, which is what happened. Joe Manchin was willing to overthrow the entire stimulus bill because of this unemployment deduction, and he held up the entire Senate for the whole night until he agreed once Democrats agreed to add in a $150,000 cap on it. (And this was after he lowered the cutoff for the stimulus from $200k on the House bill to $160k, which is a HUGE difference and creates an insane cliff there too with an unfair marginal rate.) Even though only a tiny fraction of people getting unemployment make that much anyways! But he really strongly believed in people above that magical 150k number not getting anything and fought it to the death, even if it affects almost nobody. So they rushed it in cause they wanted to go to sleep, and forgot to phaseout the income cap even a little so this is what you get! They also forgot to make it $75k for singles for no apparent reason. Crazy stuff.

Mordy

Dan. The $1400 is a 2021 tax credit. So even if you made 200k in 2020, as long as you will make less then 150k in 2021, you will get the credit. Also, you can do a Ira to reduce the max amount.

pinay

Couples who make up to $162k may want to contribute the $12K max before thisyears May 17 ira contribution deadlines (for couples under 50) to an ira to lower their AGI. The self-employed may be able to contribute even more to a SEP IRA or other retirement plan to lower their AGI below $150k (that contribution deadline is later, typically the extension deadline for the company tax return) this can be a very lucrative return on an IRA Contribution. Speak to your tax adviser.

CtownBin

A couple who made $162k will not be eligible to deduct their IRA contributions, unless NEITHER of them participated in a workplace retirement plan at all (very unlikely at that income level). The ability to double-dip- meaning, contribute to 401k/403b AND still deduct the IRA contribution- phases out completely for a couple at $124k.

shmuel

thank you for the informative article novices like me in accounting, but when you say 10,200 is non taxable, i already qualified for unemployment from ny state and opted to have them automatically take off federal and state taxes during the application process, so instead of giving me 300 what I qualified for federal they gave me 252 or 525 instead of 600 , can i get 10,200 off that money back now retroactively? even for the taxes paid to the state i qualified for 330 they direct deposited 294

pinay

the tax will be refunded when you file your tax return

CtownBin

It’s not a big deal- the unemployment witholding will be treated like all regular W-2 tax witholding. Anything you had witheld over what you needed to will be part of your tax refund when you file your taxes. No need to do anything except file a regular tax return using the 1099-G form you got from your state, which has the witholding amount on it.

GUWonder

The Biden Covid-19 response plan has been very generous (and only possible because of Georgia’s new Senators), and this IRS thing just adds to that. But not generous for me at this point.

At some point it will come time to pay the piper for all these generous notes.

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