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U.S. income tax rules relating to pandemic unemployment compensation

IR-2021-81, April 8, 2021

WASHINGTON — The Internal Revenue Service reminds eligible residents of the U.S. territories that if they receive unemployment compensation payments that are otherwise subject to U.S. income tax, they may be eligible to exclude up to $10,200 per person of unemployment compensation from U.S. income tax for 2020, following legislation that was passed March 11, 2021.

Taxpayers with modified adjusted income of less than $150,000 may exclude the first $10,200 of unemployment compensation from their 2020 federal income tax return. In the case of taxpayers that are married filing jointly, the maximum exclusion would be $10,200 for each spouse for a maximum of $20,400. Taxpayers who filed before the law was passed should not file an amended return.

Last year, in response to the COVID-19 pandemic, Congress passed legislation providing eligible individuals with two new types of pandemic-related unemployment compensation, which are subject to the same U.S. tax rules that apply to other unemployment compensation:

  • Pandemic Unemployment Assistance (PUA)

  • Federal Pandemic Unemployment Compensation (FPUC)

The $10,200 exclusion applies to these new types of unemployment compensation for U.S. income tax purposes.

The IRS also notes that for U.S. income tax purposes, unemployment compensation is generally considered sourced where the taxpayer performed the underlying services. For guidance on the U.S. income taxation of residents of the U.S. territories, see Publication 570, Tax Guide for Individuals with Income from U.S. Possessions.

The U.S. territories are American Samoa, the Commonwealth of the Northern Mariana Islands, Guam, the Commonwealth of Puerto Rico, and the U.S. Virgin Islands.

U.S. territory residents should contact their territory tax department with questions relating to the taxation of COVID-related unemployment compensation at the territory level.

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