Double deduction for Unemployment Compensation exclusion by IRS

[Robbie]

Client just received a refund check.  The IRS adjusted the return to deduct and additional $10,200 for the unemployment compensation exclusion which shows on the original return on line 8 of Schedule 1.  

I held returns with unemployment income pending a resolution as to how to report the exclusion amount, so the exclusion was reported correctly on the original return.

Has anyone else seen similar refunds?  I have a number of clients who benefited from the exclusion and I am wondering if I should advise them not to cash the refund checks, as they are erroneous.  

 

[Lee B]

Did you use the worksheet or did you override?

[HV Ken]

Community property state? This is precisely how it is being handled in this case!

[Robbie]

No I didn't override.  I held the returns with unemployment compensation until the program processed the exclusion in the recommended manner.

Community property state?  Don't understand the question.  The 1099G was in spouse's name etc.  There is only one exclusion.  Or on separate returns, each would get one half.

 

 

[BulldogTom]

5 hours ago, Robbie said:

No I didn't override.  I held the returns with unemployment compensation until the program processed the exclusion in the recommended manner.

Community property state?  Don't understand the question.  The 1099G was in spouse's name etc.  There is only one exclusion.  Or on separate returns, each would get one half.

Late in the tax season, the IRS agreed that in community property states, the income from UI was community income, therefore both spouses can claim the $10,200 exemption from income, even if only one received UI, provided they meet the other qualifications.   It was iffy for a while if the IRS would agree, but eventually (like in late May) they did.   So if your Married CA client had more than $20,400 in UI, and you only excluded $10,200, the IRS just corrected the return and gave your clients their refund.

Tom
Sparks, NV

[Lee B]

I can see the argument for doing it this way. However I really don't like the result, because it doesn't treat the residents of all states the same!

[BulldogTom]

1 hour ago, cbslee said:

I can see the argument for doing it this way. However I really don't like the result, because it doesn't treat the residents of all states the same!

The law was written so hastily that this aspect was overlooked.   The IRS would have had to go back to Congress to change the law to get what might have been the intended result.   As it is, I think they made the right call correct analysis based on historical treatment of income in community property states. 

My guess is they did the analysis and went to the administration to ask if they should ask for a technical correction in some non-partisan bill and the administration looked at who would benefit (voters with under 150K of income) and decided to let it fly as is.   Just me looking at the tea leaves and coming to my own conclusions on how this went down.

Tom 
Sparks, NV

[Robbie]

Thanks, Tom.

I was exhausted at the end of tax season and entirely missed that change.  Thanks for advising me.  I do appreciate it. 

[Tax Prep by Deb]

Thanks Tom,

I just had a client get more money and I thought it was a mistake, but your explanation explains the whole thing.  Thanks!

[beckster2010]

On 8/12/2021 at 6:02 PM, BulldogTom said:

Late in the tax season, the IRS agreed that in community property states, the income from UI was community income, therefore both spouses can claim the $10,200 exemption from income, even if only one received UI, provided they meet the other qualifications.   It was iffy for a while if the IRS would agree, but eventually (like in late May) they did.   So if your Married CA client had more than $20,400 in UI, and you only excluded $10,200, the IRS just corrected the return and gave your clients their refund.

Tom
Sparks, NV

Thanks Tom!  This was in the back of my mind, but didn't find it's way forward until a client sent their CP21B notice to me with the changes (such a nice client to actually remember to send when received to me).  I'm going to place the IRS note into my files for documentation. 

How are all of you handling these IRS amendments/changes into your tax program?  Are you entering as an "Amended Return" so that your records are the same as IRS?  

And I thought tax season was over!

I really appreciate this forum.  Enjoy your day!