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According to Michael Gray, CPA, “Sometimes Congress passes legislation that’s retroactive. This change relates to millions of taxpayers who received unemployment compensation during 2020 and who are dutifully submitting their federal income tax returns. They should wait this year until a new exclusion can be processed.”

While many are excited to receive another federal government stimulus check, those who received unemployment compensation during 2020 should be aware of a tax break in the American Rescue Plan Act of 2021, COVID-19 relief legislation passed in Congress on March 10.

If a taxpayer (same threshold for a single or joint return) has adjusted gross income of less than $150,000, up to $10,200 of unemployment compensation received is excluded from federal taxable income. This exclusion only applies for unemployment compensation received during 2020.

It will probably take at least a week or two for the tax return preparation software providers to incorporate this change in their software. The IRS also has to update its efile processing system to recognize this change.

Unless the IRS changes the April 15 filing date, there is only a little over a month left for this year’s tax filing season. If necessary, you can file for an automatic extension of time to file using IRS Form 4868.

So, if you received unemployment compensation during 2020 and qualify for the exclusion, wait to file your federal income tax return until it can be processed. If necessary, file for an extension of time to file using Form 4868.

What if you already filed your 2020 federal income tax return and you qualified for the exclusion? You can claim the exclusion using the federal amended income tax return form, Form 1040X. You might want to get help from a tax professional for this.

Here is a link to the text of American Rescue Plan Act 2021, H.R. 1319. The unemployment compensation exclusion is at Section 9042. https://www.congress.gov/bill/117th-congress/house-bill/1319/text