If you received unemployment benefits in 2020 but still made too much money to receive the full $1,400 incentive check, a provision in the $1.9 trillion coronavirus relief law could change that for you.
One of the bill’s provisions makes unemployment benefits exempt from federal tax, retroactive to 2020 benefits.
The IRS clarified Tuesday that unemployment benefits do not count toward adjusted gross income, the figure used to determine whether people qualify for the $1,400 incentive payment. This means that more people are eligible for the incentive checks.
This is how it works.
Federal taxes are waived on the first $10,200 in unemployment benefits for singles, or $20,400 for married couples who both collect unemployment and file joint tax returns.
To qualify for the tax break, households, whether single or married, must not have adjusted gross incomes greater than $150,000, said Neil Becourtney, a certified public accountant at CohnReznick in Holmdel.
New Jersey does not tax unemployment benefits.
Becourtney gave this example. Suppose a married couple had a wage of $148,000 in 2020 and unemployment benefits of $12,000. Before the Incentive Act, that would have brought their adjusted gross income to $160,000 and they would not have been eligible for an incentive payment, which has a $150,000 cap on the full benefit. But by exempting the unemployment benefits from federal tax and not being part of the adjusted gross income, the couple’s adjusted gross income of $148,000 would make them eligible for two payments of $1,400.
“If unemployment benefits would have pushed taxpayers to the point of ineligibility for a $1,400 incentive discount, this provision could therefore provide a double benefit,” he said.
Becourtney also gave this example. Take a single person who made $73,000 in wages and had $9,000 in unemployment benefits in 2020. Without the non-taxable provision, the adjusted gross income would be $82,000. The taxpayer would not have been eligible for the $1,400 incentive, which has a limit of $75,000 for a full benefit and $80,000 for a partial benefit for singles. But because the unemployment benefit is not taxable, the adjusted gross income is only $73,000 and the person is eligible for the full payment of $1,400.
The IRS said Tuesday that people who have already filed their tax returns do not need to file an amended return to receive the tax-free unemployment benefits. Instead, the agency will automatically recalculate taxes owed and send a refund to eligible individuals.
Use our stimulus calculator to see how much you can receive.
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NJ Advance Media Staff Writer Jonathan D. Salant contributed to this report.
Karin Price Mueller can be reached at: [email protected].