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Date: April 6, 2021
The Department administers the city income tax for the City of Detroit. This Notice addresses the unemployment compensation deduction available to Detroit taxpayers under the City Income Tax Act[1] and the effect of the federal American Rescue Plan[2] on the Detroit unemployment compensation deduction.
The City of Detroit does not tax unemployment compensation. Although unemployment compensation is generally included as taxable income on federal and State of Michigan income tax returns, unemployment compensation is not taxable under the City Income Tax Act.[3]
Effect of the American Rescue Plan on the taxation of unemployment compensation. The federal American Rescue Plan was signed into law on March 11, 2021. The federal law excludes up to $10,200 per person for unemployment compensation reported on a 2020 federal income tax return.[4] City of Detroit taxpayers are unaffected by the unemployment compensation exclusion provided under the American Rescue Plan since the City does not tax any unemployment compensation.
City of Detroit taxpayers who filed their Federal and City returns before March 11, 2021. City of Detroit taxpayers who filed their federal and City returns before March 11, 2021 already have deducted 100% of their unemployment compensation.[5] Taxpayers who filed federal and City returns before March 11, 2021 should not file an amended City return because they have received a maximum deduction of 100%.
City of Detroit taxpayers who filed - or will file - their Federal and City returns on or after March 11, 2021. As a result of the federal American Rescue Plan, federal adjusted gross income may be reduced by the amount of the unemployment compensation exclusion allowed under the new federal law. Since the City of Detroit return begins with federal adjusted gross income, the amount of unemployment compensation that can be deducted on the City return is only the federally taxable portion of unemployment compensation reported in adjusted gross income. In other words, the amount of the City income tax deduction will be reduced by exactly the amount excluded on the federal return. For example, for a single taxpayer who received $18,200 in unemployment compensation and excluded $10,200 on the federal return, the amount in adjusted gross income after the exclusion is $8,000. The City taxpayer may deduct only the $8,000 on the City income tax return.
[1] MCL 141.501 et seq.
[2] Public Law No: 117-2.
[3] MCL 141.632(c).
[4] Public Law No: 117-2, Sec. 9042.
[5] Total unemployment compensation is reported on Line 7 of federal Form 1040 Schedule 1: Additional Income and Adjustments to Income. 100% of the reported federal amount of unemployment compensation is deducted on line 34 of the City of Detroit Resident Income Tax Return Form 5118 for those who filed before March 11, 2021. For those who file a federal return after that date, the deduction is Line 7 reduced by the deduction on line 8 of the federal Form 1040 Schedule 1.