Notice: Update to April 1, 2021 Notice Regarding the Treatment of Unemployment Compensation for Tax Year 2020

Date: April 27, 2021

This Notice addresses the unemployment compensation exclusion (also, "unemployment exclusion") in the federal American Rescue Plan Act[1] and its effect on the taxable income of Michigan resident taxpayers under the Michigan Income Tax Act.[2]  This Notice is an update to the Notice published April 1, 2021, and provides guidance to taxpayers who have already filed their tax year 2020 returns. 

Background

On April 1, 2021, the Department issued a Notice explaining the Michigan individual income tax impact of the American Rescue Plan Act's (ARPA) exclusion of up to $10,200 of unemployment compensation. That Notice explained that taxpayers who filed tax year 2020 income tax returns may not have included the unemployment exclusion and may therefore be entitled to a refund.  Similar to guidance issued by the Internal Revenue Service, the Notice requested that taxpayers refrain from filing amended returns while the Department explored potential automated mechanisms for making unemployment exclusion adjustments to original returns without the need for an amended return. Taxpayers were advised that additional guidance would be forthcoming. The Department is now providing updated instructions about how to report the unemployment compensation exclusion in Michigan for taxpayers who have already filed. 

Filing Amended Returns to Report the Unemployment Exclusion in Michigan

The Department is requesting that all taxpayers who already filed an original 2020 Michigan tax return without reporting the unemployment exclusion (for example, if the original return was filed prior to the American Rescue Plan Act) now report the unemployment exclusion by filing an amended Michigan tax return. Though the Department is still exploring potential automated mechanisms regarding the unemployment exclusion, taxpayers are strongly encouraged to file an amended return to claim any refund that may be owed to them. Any information regarding an automated solution - if possible - will be communicated in future guidance from the Department, but there is no current timetable or certainty for this option.

An amended return reporting the unemployment exclusion will allow many taxpayers to receive an additional tax refund and allow for some other taxpayers to reduce a scheduled tax payment. Depending on the taxpayer's original return, the exclusion should be reported in accordance with the following instructions:

1. Taxpayers who filed an original return and either claimed a refund or paid the tax at the time of filing.

Taxpayers eligible to receive a refund due to reporting the unemployment exclusion include taxpayers who claimed a refund on the original Michigan return and taxpayers who paid any tax due with the filing of that original return.  These taxpayers should file an amended Michigan income tax return to claim that refund. In amending the return, taxpayers who claimed a refund on the original return should check the box on Form MI-1040, line 31a, and write any refund received from the original return on the line.

2. Taxpayers who filed an original return resulting in tax due, but scheduled a tax payment for a future date, such as May 17, 2021.     

A taxpayer who owed tax on their original return may have scheduled the tax payment for a later date, such as May 17, 2021.[3]  The unemployment exclusion may allow these taxpayers to reduce the tax liability subject to that scheduled payment or eliminate that payment altogether. These taxpayers should also file an amended return, but because the tax payment is pending, there are additional considerations:

• Before filing the amended return, the taxpayer should, if possible, cancel or stop the pending payment by contacting the financial institution issuing that payment. If the scheduled tax payment is cancelled, then the taxpayer must pay at the time of filing the amended return any tax still owed - if any - on that return. In completing the amended return, taxpayers should not write the amount of the original return payment on the amended MI-1040, line 31b.
• If it is not possible to stop the payment, or if the amended return is filed after the scheduled payment date, then the original return payment will be processed with the original return. In this case, the taxpayers should claim a refund on the amended return. In completing the amended return, check the box on line 31a of the amended MI-1040, and write the amount of the original return payment on that line.

Instructions for Filing an Amended Return

The Department always encourages taxpayers to submit returns and in this case - amended returns - electronically.  Many software products that taxpayers used to file their original returns have been updated to include this unemployment change for amendment purposes.  E-filing the amended return will ensure a greater level of accuracy and faster processing times.  For any taxpayer that chooses to paper file the amended return, that taxpayer should use Form MI-1040, check the "Amended Return" box, and include Schedule AMD and all forms and schedules submitted with the original return. For additional help, please visit: Amending Your MI-1040 Due to the Recent Federal Unemployment Exclusion. 

The following must be submitted with any amended return:

• If the taxpayer has received it, proof that the IRS has adjusted the federal return due to the unemployment exclusion such as, for example, a copy of a federal adjustment letter.
• Schedule AMD, Amended Return Explanation of Changes (Form 5530), and all forms and schedules submitted with the original return. 
• A copy of the 1099-G that reports unemployment compensation.

In addition, taxpayers should note that direct deposit of a refund is only available on an original return, so refunds for amended returns will be sent as a paper check in the mail.  Please ensure the address on the amended return is correct.

Failure to follow the instructions within this notice may result in delays in processing a refund claimed on the amended return.

Miscellaneous

The Department will process these amended returns in an expedited manner and issue refunds accordingly. Interest on any refund will be computed in accordance with Section 30 of the Revenue Act.[4]  All amended returns remain subject to audit and review based on information received from the IRS.