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.

[Camp1040]

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.

[PATAX]

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...

[Camp1040]

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]

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...

[Camp1040]

Good point, and if they could not qualify for UC they had a shot at PPP!

[IRonMaN]

It's all free money!!!!!!!!!  Everybody get in line and get your FREE MONEY.   FREEEEEE MONEY!!!!!!!!!  Step right up and get your FREE MONEY!   

This tax season has left a bitter taste in my mouth.  Several clients retired in 2019 only to become "unemployed" in 2020.  "It's owed to them".  "They worked for it".  "Everybody else is doing it".  And a lot of those folks that lined up for unemployment or PPP are they same people that complain about other folks collecting a welfare check.  Can somebody explain the difference to me?

[Camp1040]

I have 3 more returns that fit my original post scenario, it will be interesting to see if they get corrected, plus interest like the other two!

[BobKamman]

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?

[Camp1040]

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.

[PATAX]

@IRonMaN the Hypocrites showed their true colors...

[BobKamman]

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?  

[Camp1040]

Total income: $38,732

UC:  $7,836

Total SS: $21,967 Taxable amount $7969 mine and proseries calculation.

Schedule 1, line 9: 13,919

Adjustments to income: $2967

Schedule 2 line 10: $1963

SD: $26,100

AGI: $35,465

IRS calculation AGI: 30,735

Hope that helps.

[BobKamman]

I tried duplicating this but there are too many things happening at once.  I'm assuming there was $13,893 of Schedule C income for the amount on Schedule 2 to be SE tax -- but then, there must be other adjustments to income.  IRA, perhaps?  And the IRA computation can affect the SS computation.  Is the total income $38,732 including the $7,836 unemployment?  I can see why IRS might be confused.  

[Camp1040]

The $38,732 does not include the UC as it was excludable. The returns were computed with the retroactive changes properly updated in the software.

Yes, other adjustments $250 educator expense, $1735 selfemployed HI deduction.

QBID: $1873 That the IRS reduced to $927.

[Camp1040]

The bottom line on this particular calculation is that I figured the taxable amount of SS using the IRS instructions and the proseries basic software and correctly ( I assume) calculated taxable SS, using the full amount of UC received before any exclusion.

The IRS corrected the returns and calculated the taxable amount of SS using the net amount of UC if any after the allowed exclusion.

I have checked and rechecked the returns. I will wait for the clients to notify me that the correction has been corrected or the IRS may ignore it and plow ahead manually reviewing the 17 million returns they have in the queue.

Thanks for all the input on the issue!

[BobKamman]

I get the same result as you did, if I calculate the taxable part of SS with the UC included, and the same result as IRS did, if I calculate it by disregarding the UC.  

I tried to find the announcement from back in April (or thereabouts) when IRS said the $150K limit was figured without adding the UC.  I think it was based on a statement from Sen. Wyden that the amendment to ARP meant to do it that way.  I can see where the same language could be read to justify disregarding UC when figuring the taxable SS, but I don't think any announcement of that has been made and the IRS has not changed the "Unemployment Compensation Exclusion Worksheet."  

It's already August so I'm not going to worry about 2020.  It's time to start guessing when Congress will enact a UC exclusion for 2021.  Maybe in January?