Here is Text of Unemployment Exclusion Amendment to Senate Bill

[BobKamman]

With the caveat, that I haven't yet looked at the final "Manager's Amendment" (No. 1398) that made technical corrections and was passed by voice vote.  This is from the Wyden Amendment 1378.  It looks to me like:  1)  $150,000 is same for every filing status; 2) it's all-or-nothing, no phase-out.  

SEC. 9042. SUSPENSION OF TAX ON PORTION OF UNEMPLOYMENT
COMPENSATION.

(a) In General.--Section 85 of the Internal Revenue Code of
1986 is amended by adding at the end the following new
subsection:
``(c) Special Rule for 2020.--
``(1) In general.--In the case of any taxable year
beginning in 2020, if the adjusted gross income of the
taxpayer for such taxable year is less than $150,000, the
gross income of such taxpayer shall not include so much of
the unemployment compensation received by such taxpayer (or,
in the case of a joint return, received by each spouse) as
does not exceed $10,200.
``(2) Application.--For purposes of paragraph (1), the
adjusted gross income of the taxpayer shall be determined--
``(A) after application of sections 86, 135, 137, 219, 221,
222, and 469, and
``(B) without regard to this section.''.

[IRonMaN]

Yeah but, when is Intuit going to have their software updated.  I checked this morning and all of the unemployment is still showing as taxable.  I pay good money for this software and they are letting me down again.  I'm sure Drake and Ultratax already have their software changed 🙄

[BobKamman]

Intuit may have its software updated, before IRS.  Can you e-file a 1099-G with zero income, that shows federal income tax withheld?  The schemers need to work around that.  

The bigger problem is going to be state conformity.

The obvious question is, why are you doing this for 2020 and not for 2021, after just extending the benefits for another six months or so?  The answer is, that would add to the price tag and we are working with this darn $1.9 trillion limit.  We'll come back later and exclude 2021.  Like, maybe by next March.  

[qbteachmt]

"The bigger problem is going to be state conformity."

I forget which State it was, but yesterday when doing some research I came across a State's determination that, while they don't tax their SUI, they are taxing the PUA/LWA/FPUC/PEUC component.

"Conform" should be a 4-letter word.

[IRonMaN]

I thought I read a post here the other day that the states were going to be conforming in alphabetical order.😀

[qbteachmt]

"I thought I read a post here the other day that the states were going to be conforming in alphabetical order."

Bob assigned himself to that counter.

[SanBrunoTaxGuy]

"I checked this morning and all of the unemployment is still showing as taxable."

Are you this clueless?  Like wow.  The House didn't vote on it yet, the president didn't sign it yet, and you expect the software to update a bill that hasn't been passed as law yet?

https://youtu.be/FFroMQlKiag

I hope you are trying to be funny but wow.

[IRonMaN]

I'm always very, very serious.

I checked this afternoon and it still isn't updated. 😬

[BobKamman]

I would again point out my theory on why many accountants have no sense of humor, but it just gets me in trouble. 

Meanwhile, here is something serious from Politico's morning tax letter:

First, the timing: [Senator] Wyden’s office says that anyone eligible for the tax relief on unemployment insurance who has already filed their taxes for 2020 will need to fill out an amended return.

But Nina Olson, the former national taxpayer advocate, said it wouldn’t be too much more work for the IRS to do more of the heavy lifting — adjusting taxable income on its own and then sending out refunds.

The IRS would want Congress to specifically ask it to pull those levers, Olson added, but her suggestion would clearly be easier for taxpayers. As for the tax collector? The IRS will be in for more work, no matter what.

Keep in mind that the IRS will have to deal with all those amended returns spurred by waiving taxes on UI benefits. And that, Olson said, “really does create more processing burden for the IRS, which is struggling to dig itself out of last year’s correspondence and adjustments.”

[IRonMaN]

Interesting - I was wondering if they would consider going that route.

[qbteachmt]

{facetious font on}"I checked this afternoon and it still isn't updated"{/facetious font off}

Fixed it for you.

[IRonMaN]

I don't know what "facetious" is.  I believe I am the most serious person here.  Tax stuff is serious and we need to make sure we stay completely serious.  If we start smiling or laughing, well, that would be the downfall of tax preparer civilization as we know it.

[mahoney234]

How do you interpret "(B) Without regard to this section"?  If a taxpayer has an AGI of $151,000 which includes $10,000 of unemployment compensation, is the unemployment taxable or not?

[Shark]

Spoke with Sen. Wyden's office and they indicated that the 10.2k is deducted from total agi and if the amount of the remaining agi is less than 150k, you will qualify.  If 150k or over, not eligible.  So to answer your question, if 10k in UI is deducted from AGI and that number if below 150k, you are eligible for the tax break.

[BobKamman]

Did Senator Wyden's office also explain about the other exceptions to computing AGI?  I don't have time to analyze those references thoroughly, but these are what are included on that laundry list of Code sections:

86 = Taxable Social Security

135 = Savings Bonds used for education

137 = Adoption assistance paid by employers

219 = IRA's and other retirement plans

221 = Student loan interest

222 = Tuition deduction

469 = Passive Activity losses

I'm starting to picture a two-page worksheet.  

[Shark]

They did not.  Some of those references are above the line deductions.  Would be logical that the 10.2k will either be an above the line deduction or just completely be taken off the 1099-g and not taxed at all.

[rbynaker]

---

@Shark wrote:

Spoke with Sen. Wyden's office and they indicated that the 10.2k is deducted from total agi and if the amount of the remaining agi is less than 150k, you will qualify.  If 150k or over, not eligible.  So to answer your question, if 10k in UI is deducted from AGI and that number if below 150k, you are eligible for the tax break.

---

With Bob's original caveat still in play here (so this is based solely on the copy/paste above which may or may not be the actual legislation when/if it's signed):

Section 85(c)(2)(B) reads:

"(B) without regard to this section"

A "section" is a reference to the entire IRC 85, including 85(a) which states:

"(a) In the case of an individual, gross income includes unemployment compensation."

So I'll disagree with whomever you spoke to at Wyden's office.  The entire amount of UI would be subtracted from AGI when making the determination of whether or not you fall off of the $150K cliff.  If they had only wanted the excluded UI to count (up to $10.2K) they would have referenced sub-section (c) instead of the entirety of section 85.  Maybe there's a Committee report that has a clarifying example buried in a footnote that will give us the "sense of Congress" on this.

That said, SCOTUS has a recent history of ignoring the things that Congress actually writes into the laws and instead using its own interpretation of what Congress meant to write (or at least what they think Congress probably meant to write . . . )

Just my random ramblings on the subject.

[BobKamman]

@rbynaker 

It’s been a long day so maybe you can figure out what this means:

“(A) after application of sections 86, 135, 137, 219, 221, 222, and 469, and . . .”

It looks to me like that’s a list of things they’ll give you to arrive at this special AGI. But doesn’t that imply a list of things they won’t give you? There are some oddball adjustments, but the major ones apparently not allowed are:
–half of SE tax
–self-employed health insurance
–health savings account
–alimony paid
–educator expenses ($250)
–first $300 of cash charitable.

But yes, I think you are correct. AGI of $165K with $18K of unemployment – that still qualifies, even if the $10K exclusion just reduces AGI to $155K.

At the same time, a return could show $140K AGI but only after $5K into an HSA and $10K for alimony.  That adds up to $155K "adjusted AGI," so with only $4K of unemployment, that's still taxable.  

[rbynaker]

I was a little puzzled by that too.  The reference to Adjusted Gross Income seemed sufficient to me, I have no idea why they cherry-picked certain adjustments.  I'd have to dig a little deeper into other existing definitions of AGI in the code to try to shed some light on it.

So even if this passes as-is there are already a plethora of "what about" questions that will need to be clarified by the IRS before anyone can program changes into tax software.  Fun.

[BobKamman]

I think there's a Senator who was OK with sending $1,400 to a guy living in Vienna, Austria, and making $180K a year, but not with sending $1,400 to a guy living in Vienna, West Virginia and making $75K a year..  Probably has something to do with inhaling too much coal dust.  

[rbynaker]

In a trip down the rabbit hole, AGI is defined in section 62:

https://www.law.cornell.edu/uscode/text/26/62

and is a mish-mash of original definitions (educator expenses & jury duty pay remitted to the employer) and references to other sections including sections 401 pensions & 219 IRAs.  Also including sections 221 student loan interest and 222 tuition & fees (which makes including them again by reference in section 85 completely redundant.)  I didn't see 1/2 SE tax specifically but my guess would be that it's included as part of "trade and business" deductions since it's conceptually just the deductible "employer" half of FICA taxes.

I have not done an exhaustive search line-by-line and section-by-section to see what might NOT be included but most things are in there somewhere either as part of section 62 AGI or by reference from the updated section 85.

Rick

[BobKamman]

I don't need no stinkin' Internal Revenue Code.  I just looked at Form 1040, Schedule 1, lines 10-21.  

[Shark]

That makes sense.  That is not exactly what the Senator's office said, but it makes sense to exclude all for see if the remaining income is 149,999 or below.

[rbynaker]

---

@rbynaker wrote:

---

@Shark wrote:

Spoke with Sen. Wyden's office and they indicated that the 10.2k is deducted from total agi and if the amount of the remaining agi is less than 150k, you will qualify.  If 150k or over, not eligible.  So to answer your question, if 10k in UI is deducted from AGI and that number if below 150k, you are eligible for the tax break.

---

With Bob's original caveat still in play here (so this is based solely on the copy/paste above which may or may not be the actual legislation when/if it's signed):

Section 85(c)(2)(B) reads:

"(B) without regard to this section"

A "section" is a reference to the entire IRC 85, including 85(a) which states:

"(a) In the case of an individual, gross income includes unemployment compensation."

So I'll disagree with whomever you spoke to at Wyden's office.  The entire amount of UI would be subtracted from AGI when making the determination of whether or not you fall off of the $150K cliff.  If they had only wanted the excluded UI to count (up to $10.2K) they would have referenced sub-section (c) instead of the entirety of section 85.  Maybe there's a Committee report that has a clarifying example buried in a footnote that will give us the "sense of Congress" on this.

That said, SCOTUS has a recent history of ignoring the things that Congress actually writes into the laws and instead using its own interpretation of what Congress meant to write (or at least what they think Congress probably meant to write . . . )

Just my random ramblings on the subject.

---

Looks like the IRS interpretation is that you include the entire amount of unemployment received as part of AGI when applying the $150K limitation.  Here's the worksheet:

https://www.irs.gov/faqs/irs-procedures/forms-publications/new-exclusion-of-up-to-10200-of-unemploym...

Wks Line 1 instructions:  "Include the full amount of unemployment compensation you received in 2020 on Schedule 1, line 7."

Wks Line 2 instructions:  "Do not reduce this amount by the amount of unemployment compensation you may be able to exclude."

I disagree with them but at this point I have no dog in the race (no clients just over the $150K bubble where my disagreeing with the IRS would lead to my signature on a return that follows the law instead of following the instructions.)

@Shark you might try contacting Wyden's office and pointing out that what they told you should happen is not what the IRS is doing.

Rick

[Shark]

You are correct.  This is exactly opposite of what Sen. Wyden's office said.  The calculation for the 150K was supposed to not include the UI.  I will call them on Monday.  Not sure what they will do now that IRS has published, but will see what they say.  Supposedly, the one who provided the response was the tax expert in his office that was involved in writing the amendment.

[BobKamman]

Right now all we have are hypotheticals. But I’m sure the Tax Court will come across a case like this and explain the law, a few years down the road:

Husband and wife in 2020 have $140,000 in W-2 income and $10,000 each in unemployment. That makes their AGI $160,000. IRS says sorry – you’re over the limit. But if their AGI is computed before application of Section 85, which made it taxable, they have only $140,000.

What difference does it make? First, they have to pay tax on another $20,000. Then, let’s give them three kids. They’re now not eligible for EIP#3, which would be $7,000. They lose out on some of their EIP#1 and EIP#2, also, if their 2019 income was too high for them to qualify.

IRS got it fast. But did they get it right? Stay tuned.

[Shark]

@rbynaker Question for you.  Since this seems contrary to the law, would you consider excluding and explaining later if audited?  Or do you think that would not be a good idea?

[rbynaker]

Please keep us posted!  I appreciate that you went straight to the horse's mouth on this one.  I doubt anyone will fight harder to set the IRS straight than the guy who wrote it!

[rbynaker]

I'd be in no hurry to do much of anything.  Wait and see how this plays out in the coming weeks.  I haven't found a report that explains the thinking behind this.  When it came to the $300 above-the-line charity limit for MFJ, it turned out that the "intent" of Congress was buried in a footnote in the CARES Act committee report rather than in the actual law.  There could easily be something like that for this as well that I just haven't seen yet.

Absent other evidence to the contrary, I would (with the client's permission) take an aggressive position for folks "on the bubble" and disclose my contrary position while pointing to the language written in the law, "without regard to this section".

As Bob mentioned, this could have far-reaching effects, well beyond just the simple x% income tax.

[Shark]

You are correct.  Ramifications could be very costly.  In your scenario, they may qualify for the full EIP #3 as a recovery rebate if their 2021 AGI is less than $150k, but they should not have to go through this at all.  Seems IRS rushed this out.

[Shark]

Will do.

[BobKamman]

From the Washington Post:

Sen. Ron Wyden (D-Ore.), the chairman of Senate Finance Committee, pledged that his panel would provide vigorous oversight of the IRS as it implements the new stimulus law, starting with an expected hearing featuring Rettig in early April.

Wyden said lawmakers seek a “concrete work plan” from the agency as it embarks on a process to implement vast changes to the tax code that would provide new aid to jobless workers and families with children.

[Shark]

@BobKamman @rbynaker The more I read the amendment text, it seems so clear that none of the UI should not be included in the AGI - 150k calculation.   I verified the final language as well in the Signed bill.  It did not change.  Does anyone else have a differing view of what "workout regard to this section" means?  The prevailing view is that they are referring to section 85 and that would mean that all UI would be excluded from the calc.  IRS clearly thinks differently, at least as of now.

[BobKamman]

If you go back to Section 61, "gross income means all income from whatever source derived."  But in the beginning, there was an exclusion for unemployment.  Then it was replaced by Section 85, which brought at least part of it into gross income.  Then they just threw all of it into gross income.  So why did we need Section 85, anyway?  All we needed was Section 61, except for that confusing history of an exclusion that was partially, and then fully repealed.  I think that's the IRS argument, however feeble you might see it.  

Calling Senator Wyden's office is sort of like calling IRS Taxpayer Service.  You can get different results with the HUCA technique (Hang Up, Call Again).  I had dinner tonight with my son, who worked in a Senator's office, answering constituent phone calls, when he was in his early 20s.  He would go from a question about veteran services, to a question about taxes, to a question about Native American benefits.  Like others in that line of work, he was not a policy specialist.  You would do better to ask someone on the Finance Committee staff, but they generally don't speak to the public.  The truth is out there, though, so keep looking.  I don't see this issue going away.  I just hope it gets resolved before April 15.  

[Shark]

Spoke with Senator Wyden's office and they are going to look into the IRS guidance, since it was different than the original guidance they discussed with me last week.

[BobKamman]

@Shark 

I emailed his office this weekend.  I'm not an Oregon voter but my daughter and son-in-law are.  I don't expect my question to rise to the level of receiving anything but a canned answer, but hope springs eternal.

[pakottmann]

The IRS website says to enter on line 8 of Schedule 1 a negative amount to offset up to the 10,200.  That can be done but what about the state????  some states tax unemployment, MISSOURI does.  

If you do what the IRS says then it will come of the state also!

We need help here!!!

[Shark]

You can just amend the Federal only if no changes are needed for the state return.

[sjrcpa]

@pakottmann Wait for the software to get updated.

[BobKamman]

State tax returns have lines for reporting additions to federal AGI.  The question is when and whether their revenue departments will tell taxpayers how to use them -- and then, whether legislators tell revenue departments to start allowing the exclusion.  I think that's what is happening in Hawaii now.  Even before the Wyden Amendment, there was a bill under consideration to exclude unemployment from state tax. 

[lena6969]

Give them a chance!

[BobKamman]

This summary of ARP includes a discussion of the ambiguous Section 85(c)(2)(A):

https://procedurallytaxing.com/a-look-at-tax-provisions-for-low-income-americans-in-the-american-res...

Oddly enough, it includes a link to this thread.  

[sjrcpa]

Commissioner Rettig, speaking before the House Ways and Means Oversight Committee this afternoon (3/18/21) says individuals will absolutely not need to file amended returns to get the unemployment exclusion. Details will be released soon.

[sjrcpa]

and comment from you. 😀

[Shark]

I like the article.  No response yet from Senator Wyden.  Seems we are not the only ones that think the AGI calculation should not include the UI.

[rbynaker]

Updated worksheet:

https://www.irs.gov/forms-pubs/new-exclusion-of-up-to-10200-of-unemployment-compensation

Honestly, given what the IRS has had to deal with lately, 12 days is FAST.  The new instructions are comprehensive.  A good taxpayer-friendly step in the right direction.

Rick

[Shark]

@rbynaker Just to make sure I am reading this correctly.  The calls and email to Sen. Wyden worked.  The unemployment income is now not included in the MAGI calculation.  Are we on the same page? 

[rbynaker]

---

@Shark wrote:

@rbynaker Just to make sure I am reading this correctly.  The calls and email to Sen. Wyden worked.  The unemployment income is now not included in the MAGI calculation.  Are we on the same page? 

---

Correct.  In the "new and improved" worksheet posted on irs.gov today, MAGI excludes 100% of unemployment received when determining eligibility vs. the $150K cliff.

[Shark]

@rbynaker @BobKamman Nice job to all of us!  Since no amending is required for the Unemployment exclusion, is an amendment still required to take advantage of the resulting higher Recovery Rebate and full EIP#3 as a result of that income being excluded and AGI now being below $150K?

[rbynaker · Accepted solution]

---

@Shark wrote:

@rbynaker @BobKamman Nice job to all of us!  Since no amending is required for the Unemployment exclusion, is an amendment still required to take advantage of the resulting higher Recovery Rebate and full EIP#3 as a result of that income being excluded and AGI now being below $150K?

---

Nobody knows yet.  But that should be a whole different thread . . . and probably one best started AFTER the IRS tells us how it's going to magically refigure returns that have already been filed.  I suspect there will be plenty of cases that will NOT get caught in the IRS net to "automatically" fix these.  IMO that's summer work.  Possibly Fall.  Maybe even early Winter.