Breaking News
More () »

Here's what to do to take advantage of unemployment tax forgiveness

It could mean different things in Missouri and Illinois, and could mean more money in your pocket

ST. LOUIS — Whether it was for a week or several months, the economic impact of COVID-19 meant millions of Americans relied for some amount of time on unemployment checks to get by in the last year. The American Rescue Plan mean more of that pay could be coming your way, so what should you do to claim it?

First, remember that the IRS typically treats unemployment pay as taxable income, just like paycheck wages. The most recent COVID-19 relief package eliminates federal income taxes up to $10,200 of unemployment pay received in 2020, for those single or joint filers who make less than $150,000.

“A lot of people forgot to have their normal federal withholding that they would have on a paycheck or something like that,” said Zach McDowell, a CPA with Anders. “So this is to help compensate them so they're not having a surprise tax bill when they when they do file their 2020 tax returns.”

He said if you did have that money withheld from your paychecks, it'll come back to you in your return when you file.

“It's kind of unprecedented, something coming out in the middle of the filing season,” said McDowell. 

That means many who would benefit from this change have already filed their taxes.

McDowell said the IRS is coming out with further guidance for people in that situation; while it might not hurt to file an amended return, it might not be needed.

“It might cause you to do more work than you necessarily need to do, because the IRS could come out and say they're going to adjust it automatically and then you wouldn't have to file anything anyway,” he said.

How about at the state level? Both Missouri and Illinois tax based on federal adjusted gross income. Neither have announced any updated guidance yet, but it will matter.

To break it down, let’s say your income in 2020 was $50,000, $10,000 of that in unemployment. This year that makes your federal gross income $40,000. The states could tax you on that smaller amount. It’s also possible you could be required to add that $10,000 back in to the equation when filing with the state, and you’d then be taxed based on $50,000 in income.

“That's something they're there, but both states are working through and hopefully further guidance comes soon,” said McDowell.

That's why if this portion of the American Rescue Plan would affect you at all, McDowell recommends waiting it out a bit before taking action.

“I would advise you just kind of sit tight, as hard as that may be, because, you know, you're owed money potentially, but just kind of sit tight and wait for further guidance,” he said.

Because you have time: the new filing deadline is May 17.

Before You Leave, Check This Out