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ALERT! Some Unemployment Income Now Tax Free for 2020

What you need to know

ALERT! Some Unemployment Income Now Tax Free for 2020 Image

A surprise tax break for 2020 was passed into law in March of 2021. It may impact your situation if you received unemployment income this past year. This will mean filing amended tax returns for some and a delay in preparing your tax return for others.


Unemployment compensation was received by millions of Americans during the pandemic.

But there’s a Catch 22 with unemployment compensation. While it’s welcome income during a tough time if you’ve lost your job, it’s also classified as taxable income to be reported on your tax return.

The recently passed American Rescue Plan now makes part of your unemployment benefits free from federal taxation. Specifically, the first $10,200 of 2020 unemployment compensation is now tax free. Depending on your tax bracket, this tax break could mean $1,200 or more in taxes saved on your 2020 return.

The problem

The new legislation which contains this tax break unfortunately didn’t become law until March of 2021, a full three months after the end of the tax year and after millions of Americans had already filed their 2020 tax return! And to make matters worse, the IRS has been given no time to figure out how this tax break will be reported on your 2020 tax return.

Understanding your situation

If you received unemployment compensation in 2020, here’s what you need to know:

  • If you’ve already filed your 2020 tax return: Wait for further instructions. Lawmakers are currently asking the IRS if it’s possible to automatically make adjustments and issue a refund if you’ve already filed your 2020 return. Issuing an automatic refund will also avoid the need to file an amended tax return. So there is no need to call, we can only wait for clarification.
  • If you HAVE NOT filed your 2020 tax return: Filing your tax return will be delayed until guidance is received from the IRS and it is deployed into tax filing software. It’s unclear when the IRS will issue this guidance. Once this guidance is received, delayed tax filings can proceed. In the meantime DO NOT delay turning in your tax information as returns can still be prepared and be ready to be filed once IRS guidance is received.

Be assured you will be informed once the IRS issues further instruction on how to claim your tax break. In the meantime, enjoy the extra tax savings you’ll get sometime in the near future!

Last updated: 05/18/2022

Have questions? Contact us.

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Phone: 707-238-2281

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