On March 11, the President signed the American Rescue Plan Act (ARPA), which changed the taxation of unemployment benefits. Many musicians received unemployment benefits in 2020 due to Coronavirus shutdowns. Unemployment benefits have always taxable income, however, ARPA will allow you to exclude up to $10,200 of benefits from your 2020 income.
Musicians can qualify for this $10,200 exclusion as long as your modified adjusted gross income is below $150,000. The $150,000 earnings limit does not include amounts received as unemployment benefits. For married couples, each spouse qualifies for a $10,200 exclusion, if both received unemployment benefits. Benefits over $10,200 are still taxable income.
This change came well into tax season and many musicians had already filed their tax returns. The IRS says you do not need to file an amended return. The IRS will automatically issue a refund. Not sure if your tax return is correct? Check Schedule 1, line 7 and line 8. Line 7 should list your unemployment benefits received. On correct returns, line 8 should show “UCE” for Unemployment Compensation Exclusion and have a negative number, in parenthesis.
Should You Amend?
While the IRS will send you a refund if your return did not include the ARPA’s Unemployment Compensation Exclusion, you may want to start over. Why? If you reduce your taxable income by $10,200 or $20,400 (joint), you may discover that you are now eligible for additional tax credits, such as the Earned Income Tax Credit or the Saver’s Tax Credit. The IRS will recalculate these, if you already had them on your return. However, they will not determine your eligibility. So, if you did file your taxes before ARPA, you may want to check if you might now be eligible for any additional tax savings.
While the majority of taxpayers should not need to amend, there will be many musicians who could leave money on the table if they do not recalculate their return. If you recalculate and all the changes stem from Schedule 1, line 8, then you do not need to amend. If you have additional tax savings, or new tax credits apply due to the lower income levels, you may want to amend.
This has been quite a messy tax season for tax preparers, with changes happening in the middle of March. Do you pay state income tax? States are considering if they should match the Federal change on the taxation of Unemployment. Arkansas, for example, decided to exclude Unemployment from State Income Tax for 2020 and 2021. Some states are still in the process of changing their 2020 tax forms! Maryland is so slow to revise their instructions, they had push their state deadline to July 15.
Read more: Kiplinger’s State by State Guide to Taxation of Unemployment Benefits
2020 Tax Deadlines
If you have not filed your return, you have until May 18 this year. Residents of Texas, Oklahoma, and Louisiana have until June 15 due to the Federal Disaster Declaration from the winter storms. However, please note that if you file quarterly estimated tax payments for 2021, the deadline remains April 15 for the first quarter.
The ARPA exclusion of Unemployment Benefits only applied to 2020. At this point, there are no plans for the Federal exclusion to be carried forward to 2021. So, I would anticipate that any unemployment benefits in 2021 will be taxable. Taxes can certainly be a headache for musicians, but we can help. In our financial planning process, we address the major areas of your financial life, including Tax Strategies, Retirement Planning, Cash Flow and Budgeting, Risk Management, and Investing. We are accepting new clients and would be happy to discuss our services and how they may work for you. Here are 10 Questions to Ask a Financial Advisor and my answers, if you’d like to learn more.