The unemployment compensation exclusion is not deducted in the calculation of taxable social security. Sec 9042 of the American Rescue Package Act of 2021 adds section 85(c) to the IRS Code.

Forum|Forum|4 years ago
August 2, 2021
2 replies
35 views

The above statement is how I have been preparing returns for clients with taxable social security benefits and with UC. I have had the IRS correct 2 returns stating that the taxable amount of social security benefits were calculated incorrectly. Clients provided the letters they received from the IRS and the IRS correction is taxable social security benefits calculated using the net unemployment benefit after the exclusion.

I have updated my program and rerun error check, and my pen and paper calculations and the returns are correct as filed.

Did I miss a memo or is this happening to others. I informed the clients to put the extra refund amount aside, as the IRS may come looking for it at a later date.

Thank you for any feedback on this issue.

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PATAX

Level 12

I think for most tax preparers, including myself, most if not all of their clients who received unemployment benefits are not yet retired, I.E. they are not receiving taxable Social Security benefits in addition to the unemployment benefits... so it is probably not a widespread issue but it is definitely something that the IRS has to address and if you are correct, then the IRS should make the necessary corrections...

Camp1040Author

Level 10

I do have quite a few clients with that scenario, especially MFJ with part time income, that sans the pandemic would not have qualified for UC.

I do think, as you stated, that the IRS will correct the correction!

PATAX

Level 12

Something that I was thinking about today that is interesting is that here in Pennsylvania self-employed people we're able to collect unemployment if their business shut down... In the past self-employed people could not collect unemployment since they were not employees and did not pay into the system... With covid-19 business shut downs self-employed people were allowed to collect unemployment and this unemployment replaced their self-employment income since they weren't working... but the unemployment income was not subject to self-employment tax like their self-employed business income was... Interesting for a nerd like me... Just my opinion...

BobKamman

Level 15

Are these returns that originally reported UC as taxable, so IRS is now recalculating them and issuing refunds? In other words, have you also seen it on returns where the UC was excluded first time around?

Camp1040Author

Level 10

No, the returns in question properly had the UCE calculated.The IRS recalculated taxable Social Security by not including any unemployment compensation up to the exclusion limit. The returns in question we're below the $10,200 exclusion.

BobKamman

Level 15

Do you have an example with some real numbers for total income, unemployment and Social Security? I'm trying to remember how all this happened back in March. Was Social Security disregarded for purposes of determining whether the $150K test was met, but then the unemployment exclusion counted when calculating the taxable amount of Social Security?

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