The IRS has updated its instructions for reporting unemployment exclusions for 2020. If an individual taxpayer’s modified adjusted gross income (AGI) is less than $150,000, the American Rescue Plan ( P.L. 117-2), enacted on March 11, 2021, excludes from income up to $10,200 of unemployment compensation paid in 2020, which means the individual does not have to pay tax on unemployment compensation of up to $10,200. If an individual is married, each spouse receiving unemployment compensation does not have to pay tax on unemployment compensation of up to $10,200. Amounts over $10,200 for each individual are still taxable.
An individual whose modified AGI is $150,000 or more cannot exclude any unemployment compensation. An individual who files Form 1040-NR cannot exclude any unemployment compensation for his or her spouse.
The exclusion should be reported separately from the individual’s unemployment compensation.
See the special page on the IRS website for updated instructions for Schedule 1 (Form 1040), line 7, Unemployment Compensation, as well as an Unemployment Compensation Exclusion Worksheet to determine the exclusion and the amount to enter on Schedule 1, line 8.