Personal finance

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The IRS issued guidance Tuesday on a new unemployment tax break that makes more people eligible for the benefit.

The American Rescue Plan waives federal tax on up to $10,200 of unemployment benefits collected last year, per person.

But the $1.9 trillion Covid relief measure, which President Joe Biden signed almost two weeks ago, limited the tax cut to people who earned less than $150,000 in 2020. That threshold is the same regardless of filing status like single or married.

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Until today, the IRS signaled that taxpayers had to count unemployment benefits as part of their 2020 income when determining if they qualify for the tax break.

The federal agency said in Tuesday’s guidance that workers can exclude jobless benefits from their calculation of modified adjusted gross income, the official barometer for eligibility.

The rule change means more people will fall below the $150,000 income limit.

“It definitely expands it,” Jeffrey Levine, a certified financial planner, accountant and chief planning officer at Buckingham Wealth Partners in Long Island, New York, said of the pool of eligible taxpayers.

“This is a very generous interpretation [of the legislation],” he added.

Take the example of a married couple filing a joint tax return. They had job income of $140,000 last year. They also each had $10,200 of income from unemployment benefits.

Under prior IRS guidance, this couple would not have qualified for the tax break, due to joint income of $160,400 when factoring in jobless aid.

The new IRS calculation makes them eligible. Their income would be $140,000 for purposes of determining their qualification. Each spouse would be able to exclude $10,200 of unemployment benefits from federal tax.

The new guidance doesn’t alter the amount of tax-free unemployment benefits.

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