Unemployment tax break: How to take advantage of this new rule

Editor’s Note: This article was originally published on March 22, 2021.

You’ve probably heard how the latest relief bill also gives those with unemployment income a break on taxes. What’s probably unclear is exactly how to claim the unemployment tax break.

As the details for your federal and state taxes emerge, know this. H&R Block is here to help. Whether you’re wondering how to claim the unemployment tax break if you already filed or are getting ready to do so, Block has your back.

What you should do now

Already filed? The IRS announced it will automatically issue refunds for the unemployment tax break. These will start going out in June and continue through the summer. The IRS will start with most taxpayers who are eligible for the up to $10,200 unemployment compensation exclusion first, then look to Married Filing Jointly filers who are eligible to exclude up to $20,400. About 30 days after receiving your refund you’ll receive a letter from the IRS with details about the unemployment adjustment. Save this letter with your tax records.

This adjustment means previously filed returns do not need to be amended for the unemployment exclusion. There may be some situations where an amendment may be needed, such as if the unemployment income exclusion makes you eligible for a credit (ex. Earned Income Credit) or deduction that was not already claimed on your return. For now, you should not file federal or state amendments until further guidance is provided. We will add IRS guidance here as it becomes available.  

Haven’t filed yet? Please know that we’re ready to file your federal return and claim this new benefit on your federal return. For state taxes, adoption of the new rule will vary—and information is changing frequently. See below.

File and claim your unemployment tax break today

File your taxes to claim your federal unemployment income exclusion with H&R Block. Our tax pros can help you file in person or virtually, or you can file on your own online.

File now

2020 unemployment tax break

Let’s recap what we know. Normally, unemployment income is taxable on the federal level and in most states. However, the American Rescue Plan Act changes that and gives taxpayers a much-needed unemployment tax break.

Specifically, the rule allows you to exclude the first $10,200 of benefits (up to $10,200 for each spouse if filing jointly) from your income on your federal return if you have an adjusted gross income of less than $150,000 for all filing statuses in 2020. Any benefits you report over the $10,200 threshold will be taxed as normal.

On your return, you’ll figure the exclusion and report the amounts on Schedule 1 (Form 1040), lines 7 and 8.

How to claim the unemployment tax break for your state taxes

For state taxes, adoption of the new rule will vary—and information is changing frequently.

• Is your state adopting this new $10,200 tax break on unemployment income?
• Can you claim it now? If not, what are your options?

Find your state’s information and determine your next step. (Software users, see below.)

• If your state is ready to file today, you can prepare and file your federal and state return today!
• If your state is not ready today, you can file your federal return today, but you may want to wait to prepare your state return.

H&R Block Online users: You’ll want to follow these instructions.
H&R Block Software users: Review this document to understand if your state is ready.

Check back often! As we learn about how the states will apply the rule, we’ll update the information in the linked document above. As always, it’s good to check to see if your state has guidance on how to handle the unemployment income exclusion.

Get help claiming your unemployment income exclusion and filing your return

H&R Block is ready for you – virtually, online, and in-person.

• H&R Block Virtual: Get matched with a local tax pro, take a pic to send your documents and sit back while our team prepares your return.
• File Online: File completely independently or get some assistance from a tax pro (virtually).
• In-Person: Meet with a tax pro at a safe distance and get the tax filing help you need.