Notice: Treatment of Unemployment Compensation for Tax Year 2020

Date: April 1, 2021

 

This Notice addresses the unemployment compensation exclusion in the federal American Rescue Plan Act[1] and its effect on the taxable income and total household resources of Michigan resident taxpayers and claimants under the Michigan Income Tax Act.[2]

General rule: Unemployment compensation is taxable.  Under the Michigan Income Tax Act, "taxable income" means "adjusted gross income" under the Internal Revenue Code (IRC), subject to certain statutory adjustments.[3]  Unemployment compensation is generally included in adjusted gross (AGI) income under the IRC; therefore, unemployment compensation is also included in Michigan taxable income.[4]

Effect of the American Rescue Plan Act on the taxation of unemployment compensation.  The federal American Rescue Plan Act was signed into law on March 11, 2021.  The federal law provides a gross income exclusion of up to $10,200 per person for unemployment compensation reported on a 2020 federal income tax return for individuals under certain income thresholds.[5]  This is a federal exclusion that reduced AGI at the federal level.  Since the exclusion is taken during the calculation of AGI, no additional adjustment is necessary to receive the benefit of the exclusion on a Michigan income tax return. 

For information about how to calculate the unemployment compensation exclusion for your federal return, go to: https://www.irs.gov/forms-pubs/new-exclusion-of-up-to-10200-of-unemployment-compensation

Taxpayers that filed their federal and Michigan income tax returns and did not take the unemployment compensation exclusion on their federal return should wait to amend their Michigan return.  Eligible resident taxpayers may have filed their federal return without claiming the American Rescue Plan Act unemployment compensation exclusion.  As a result, federal AGI, used as the starting point for the Michigan return, would not reflect the federal exclusion.  The IRS issued a news release on March 31, 2021 advising taxpayers that it will recalculate their tax without the need to file amended returns to claim the unemployment compensation exclusion.[6] IRS refunds will begin in May and will continue throughout the summer.  The Department is waiting on further guidance from the IRS with respect to potential data sharing that may allow the Department to expedite Michigan income tax refunds to Michigan taxpayers.  Taxpayers should not file amended Michigan income tax returns until the Department issues further guidance. 

Taxpayers who have not yet filed their federal or Michigan income tax return do not need to wait to file.  Taxpayers who have not yet filed their 2020 income tax returns do not need to wait to file.  For the federal income tax return, total unemployment compensation is reported on Line 7 of federal Form 1040 Schedule 1: Additional Income and Adjustments to Income. The federal unemployment exclusion is reported on line 8 of the federal Form 1040 Schedule 1.  The net taxable unemployment compensation from federal Form 1040 Schedule 1 is included in federal AGI and is carried over to the Michigan income tax return without the need for any further adjustment on the Michigan return.

100% of unemployment compensation is included in total household resources and household income.  Total household resources (THR) and household income include federal adjusted gross income plus all income specifically excluded or exempt from the computations of the federal adjusted gross income.[7] Since the federal American Rescue Plan Act specifically excludes from AGI up to $10,200 per person of unemployment income, claimants must include 100% of the unemployment compensation without any deduction when computing total household resources for purposes of determining the homestead property tax credit (MI-1040CR) and the home heating credit (MI-1040CR-7). Similarly, farmland preservation tax credit claimants must include 100% of unemployment compensation in household income.[8] 

The Michigan claim forms already calculate THR correctly:

  • For general homestead property tax credit claimants, report 100% of unemployment compensation on line 23 of Form MI-1040CR.
  • For veterans and blind persons claiming a homestead property tax credit, report 100% of unemployment compensation on line 22 of Form MI-1040CR-2.
  • For home heating credit claimants, report 100% of unemployment compensation on line 28 of Form MI-1040CR-7
  • For farmland preservation tax credit claimants, report 100% of unemployment compensation using the corresponding line on Form MI1040CR, MI-1040CR-2 or MI-1040CR-7.

[1] Public Law No: 117-2.

[2] MCL 206.1 et seq.

[3] MCL 206.30(1). 

[4] MCL 206.110(1).

[5] Public Law No: 117-2, Sec. 9042.

[6] IR-2021-71, March 31, 2021.  However, the IRS also noted that amended returns may be required if unemployment exclusion calculations make the taxpayer newly eligible for additional federal credits and deductions not already included on the original tax return.   Please refer to IRS guidance for more information. 

[7] MCL 206.508(4) and MCL 206.510(1).

[8] MCL 324.36109(1).