IRS Makes a Significant Modification to Computation of ARPA Excludable Unemployment Compensation
As a tax adviser, you may have recently installed a tax software update to take into account the unemployment compensation exclusion for 2020 passed as part of the American Rescue Plan Act of 2021 and found at IRC §85(c). Now it turns out that, due to an IRS change of heart on how to read IRC §85(c)(2)(B), your software may now be subjecting unemployment to tax the IRS has now decided is not to be subject to such tax.
On March 12, 2021, the IRS provided updated instructions on their website for preparing returns that have excludable unemployment compensation.[1] However, on March 23, 2021 the IRS made a significant change in those instructions.[2]
Originally the IRS instructions had taxpayers include the unemployment compensation in determining the modified AGI (reading “without regard to this section” in IRC §85(c)(2)(B) to mean without regard to the exclusion at IRC §85(c)) but now they have decided that means without regard to any unemployment compensation covered by §85.
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