The first thing IRS would have done last week, when the unemployment exclusion seemed likely to pass, is to ask, “Has this happened before?” The answer is yes, although not retroactively. The second question they would have asked is, “What did we do back then?” This is from Pub 17 for 2009, when the first $2,400 of unemployment was not taxable:

“You should receive a Form 1099-G showing in Box 1 the total unemployment compensation paid in 2009. You must subtract $2,400 from that amount to figure how much of your unemployment compensation is taxable and must be reported on line 19 of Form 1040, line 13 of Form 1040A or line 3 of Form 1040EZ. Do not enter less than zero. If married filing jointly, include any unemployment compensation received by your spouse that is more than $2,400.”

So my prediction is that IRS will tell us just to subtract $10,200 from the Schedule 1, Line 7 amount, for qualifying taxpayers. But qualifying is complicated, for at least two categories of people:

1) Those who are anywhere near the $150,000 income limit. And is IRS going to say that really means $75,000 for MFS? The law itself says adjusted gross income is not the number shown on the tax return for AGI.

2) Those with other computations on their returns that depend on AGI. Examples are Social Security benefits, student loan interest, and tuition credits and deductions. Not to mention, recovery rebate credits.

If a taxpayer clearly does not fall into either of these categories, I will prepare a return showing the unemployment amount after the $10,200 deduction. I’m not sure e-filing will accept returns with 1099-G tax withheld, and no 1099-G income. They must have been able to do that in 2009. We’ll find out soon enough.

You can do whatever you want.