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The IRS issued guidance Tuesday on a new unemployment tax exemption that makes more people eligible for the benefit.
The American Rescue Plan exempts from federal taxes up to $ 10,200 of unemployment benefits collected last year, per person.
But the $ 1.9 trillion Covid relief measure, signed by President Joe Biden nearly two weeks ago, limited the tax cut to people who earned less than $ 150,000 in 2020. That threshold is the same regardless of the tax cut. marital status as single or married.
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To this day, the IRS noted that taxpayers had to count unemployment benefits as part of their 2020 income when determining if they qualify for the tax exemption.
The federal agency said in Tuesday’s guidance that workers can exclude unemployment benefits from their calculation of modified adjusted gross income, the official barometer of eligibility.
The rule change means more people will fall below the $ 150,000 income limit.
“It definitely expands it,” said Jeffrey Levine, certified financial planner, accountant and director of planning at Buckingham Wealth Partners in Long Island, New York, of the pool of eligible taxpayers.
“This is a very generous interpretation [of the legislation]”he added.
The IRS did not immediately respond to a request for comment.
Let’s take the example of a married couple filing a joint tax return. They had a work income of $ 140,000 last year. They also each had $ 10,200 of unemployment benefits income.
Under previous IRS guidance, this couple would not have qualified for tax exemption, due to a joint income of $ 160,400 when factoring in unemployment assistance.
The IRS recalculation makes them eligible. Your income would be $ 140,000 for the purposes of determining your qualification. Each spouse could exclude $ 10,200 of unemployment benefits from federal taxes.
The new guidance does not alter the amount of tax-free unemployment benefits.