Indiana DOR Updates Unemployment Compensation FAQs

Dated May 13, 2021

SUMMARY BY TAX ANALYSTS

The Indiana Department of Revenue announced that it has updated its previously released guidance answering frequently asked questions regarding the state and federal tax treatment of 2020 unemployment compensation to address issues raised by individuals who have already filed using a tax preparation software product, online services, or a paid tax professional.

Unemployment Compensation & State Taxes

This page contains guidance and information regarding the treatment of unemployment compensation when Gling an Indiana 2020 individual income tax return and was most recently updated on May 12, 2021.

What do I need to know about unemployment compensation I received in 2020?
I have filed my 2020 Indiana individual income tax return.
I need to file my 2020 individual income tax return and I plan to:
- File electronically or prepare my tax return using software/online services.
- Manually prepare a paper-filed tax return.
I need information about, or a copy of, Form 1099G.
I am a victim of unemployment fraud.
I have or will receive unemployment income in 2021.
I still need more information or have questions.

There are a few things you need to know if you received unemployment compensation income in 2020.

1. Unemployment compensation is taxable. Your unemployment compensation is taxable on both your federal and state tax returns. Be sure to include information from your Form 1099G.

Total taxable unemployment compensation includes the new federal programs implemented in 2020 due to COVID-19:

Federal Pandemic Unemployment Compensation (FPUC)
Pandemic Emergency Unemployment Compensation (PEUC)
Pandemic Unemployment Assistance (PUA)
Lost Wages Assistance (LWA)

2. On April 22, the Indiana General Assembly passed an update to Indiana's conformity to the Internal Revenue Code (IRC), but specifically decoupled from certain provisions of IRC, and Governor Holcomb signed this into law on April 29.

As a result, you cannot apply the same federal unemployment compensation exclusion on your 2020 Indiana individual income tax return and that income must be added back in. However, you may be eligible for a deduction that could reduce or even eliminate any state tax due on your unemployment compensation.

3. DOR revised the unemployment compensation deduction worksheet to account for the difference between federal and state treatment of unemployment income in 2020. Do not use the versions found in the IT-40 and IT-40PNR instruction booklets.

4. Unemployment income is not considered earned income for the Indiana Earned Income Tax Credit.

Find out more about conformity to the IRC and Indiana's tax treatment of federal COVID-19 provisions (/dor/legal-resources/tax-library/2020-and-2021-federal-legislation).
Information Bulletin #119 (/dor/Files/ib119.pdf), Internal Revenue Code Provisions Not Followed by Indiana and Clarification of Related Issues, has been updated to reflect several changes enacted by the American Rescue Plan Act. Also, this bulletin has been updated to provide for how the Indiana General Assembly treated various items during the 2021 legislative session. Finally, this bulletin has been updated to provide updated reporting requirements and a worksheet for calculating the Indiana unemployment deduction.

I have already Gled my 2020 Indiana individual income tax return.

Those customers who used a tax preparation software product, online services or a paid tax professional to prepare their tax return should check for information from their software product vendor or preparer regarding software updates and how the required addback of unemployment income that was excluded from their federal adjusted gross income was handled.

Many tax preparation software products were updated to perform the appropriate addback of unemployment income. In cases where the addback of this Indiana taxable income was not accommodated, DOR will automatically perform the following review, without requiring any additional action by Indiana taxpayers:

Review tax returns to determine the taxable amount of unemployment compensation for Indiana;
Make any necessary corrections to those returns;
If any additional amount is due, issue a bill for that amount in June; and

Waive any potential penalty associated with unemployment income adjustment if the bill is paid in full in a timely manner.

I need to file my 2020 Indiana individual income tax return and plan to file electronically or prepare my tax return using tax software/online services.

Those who use tax preparation software or online services to file prepare returns for mail-in or file electronically or should check to see that the company has updated its software to add back unemployment income excluded from the federal AGI. Most software vendors will include information in a software update or email to their customers. When in doubt, DOR encourages customers to contact the software vendor and ask if the necessary updates have been released.

If the software is not updated, then the taxpayer or their tax professional can:

Choose to wait for the software to be updated and file by the May 17 deadline;
File for an extension; or
File a paper return using the guidance below.

I need to file my 2020 Indiana individual income tax return and plan to manually prepare a paper-filed tax return.

Those not using tax preparation software or online services need to perform the following actions using Forms IT-40 or IT-40 PNR (https://www.in.gov/dor/tax-forms/2020-individual-income-tax-forms):

1. Add back any unemployment income excluded from the federal return onto the Indiana return. Include the following information on IT-40 Schedule 1, Line 6 or IT-40PNR Schedule B, Line 5:

Add-back name: "Conformity";
Code: 120; and
The amount of unemployment income excluded on the federal return.

2. Refer to instructions on page 18 of the 2020 IT-40 Income Tax Instruction Booklet (/dor/tax-forms/2020-individual-income-tax-forms) or page 15 of the 2020 IT-40PNR Income Tax Instruction Booklet (/dor/tax-forms/2020-individual-income-tax-forms) and the new 2020 Revised Unemployment Compensation Worksheet(/dor/files/UnempCompWorksheet.pdf) to calculate and deduct the nontaxable portion of unemployment income. Do not use the worksheet found in the current version of the booklets.

3. Include Form 1099G along with other required schedules and documents.

Form 1099G

Form 1099G reports the total taxable income DWD issues you in a calendar year and is reported to the IRS. As taxable income, these payments must be reported on your state and federal tax return.

If you received unemployment compensation in 2020, you may access your 1099G tax form, that was issued by Department of Workforce Development (https://www.in.gov/dwd/indiana-unemployment/individuals/1099g) by accessing your DWD Uplink account and checking the Claimant Correspondence page.

Information regarding unemployment and the 1099G can be found on the DWD website at www.in.gov/dwd(http://www.in.gov/dwd). If you did not receive unemployment benefits in 2020 but received notification that a 1099G was issued to you, you will need to report the claim to DWD (see below).

DOR is unable to answer questions regarding your 1099G or fraudulent claims.

Victims of Unemployment Fraud

If you're a victim of unemployment fraud, you need to report it to the DWD immediately through their website.(https://www.in.gov/dwd/indiana-unemployment/fraud) If you're a victim of identity theft or someone has simply filed a fraudulent unemployment claim in your name, all the tools you need are on that website, including how to contact the Indiana State Police.

If you are ready to file your taxes with DOR and are a victim of ID theft do the following:

1. Fill out the IRS ID Theft A davit. (https://www.irs.gov/pub/irs-pdf/f14039.pdf)

2. Email the IRS Affidavit and a copy of the fraudulent 1099G to DORITCInfo@dor.in.gov (mailto:DORITCInfo@dor.in.gov)

3. File your taxes and include all income information.

Below you will find more information and some frequently asked questions and tips for next year if you continue to receive unemployment compensation.

I have or will receive unemployment income in 2021.

If you continue to receive unemployment compensation next year, keep in mind the following tips to help plan and reduce your stress for next tax season: