Unemployment benifits

[gvosselman]

In tax year 2021 are unemployment benefits paid all taxable if I also show a business loss?  Is there a income tax exemption like in 2020?

[AdamNe]

@gvosselman  Great question! 

As of now, there is no legislation that exempts any amount of unemployment compensation from taxable income as there was in 2020. Barring any new legislation, all of your unemployment income will be taxable at the federal level, and each state has different rules around the taxation of unemployment compensation. 

Your business loss, on the federal side, will likely reduce your taxable income, but doesn't interact directly with your unemployment income. Basically, all of your income (and business loss) gets counted up in one big pot, that becomes your "taxable income."

As with unemployment compensation, different states have different rules about business losses and adjustments. You will want to make sure you understand the implications in your state as well. 

[Kajo1]

For this years taxes 2021 can you use your 2019 income if you were unemployed for the whole 2020 year  to receive the Earned income

[VolvoGirl]

Yes!   You can't use 2020 anyway.   

You can still use your 2019 earned income to get the EIC for 2021 even if you have no 2021 earned income.  See this post

https://ttlc.intuit.com/community/retirement/discussion/can-i-claim-the-eitc-this-year-using-the-loo...

[Kajo1]

So if my income in 2020 was only unemployment benefits I can still use my 2019 income for the earned income credit for my 2021 taxes that I am doing this year? Are you a tax person?

[VolvoGirl]

Sorry I meant to post this link......

You can look back and use your 2019 income for the EIC credit instead of 2020 & 2021.   How to use the Lookback provision

https://ttlc.intuit.com/community/earned-income-credit/help/how-do-i-use-the-lookback-provision-to-m...

[Kajo1]

Turbo is not giving me an option to put in 2020 anyways it only asks me if I want to use 2019 if that was higher than 2021

[JohnW152]

@Kajo1

That’s correct.  You don’t have the option to use your 2020 earned income, only your 2019 income, as that’s how the law was worded.

When your earned income was higher in 2019 than in 2021, you can use the 2019 amount to figure your EITC for 2021. The lookback doesn’t consider unemployment.  

According to Election to use prior-year earned income in Publication 596 (2021), Earned Income Credit (EIC), 

You can elect to use your 2019 earned income to figure your 2021 earned income credit (EIC) if your 2019 earned income is more than your 2021 earned income. To make this election, enter the amount of your 2019 earned income on Form 1040 or 1040-SR, line 27c..

CAUTION:  You can't use your 2020 earned income instead of your 2021 earned income. You can only use your 2019 earned income if it is more than your 2021 earned income.