Syracuse, N.Y. — One drawback to receiving unemployment benefits is that you usually have to give some of it right back to the government.
But the $1.9 trillion American Rescue Plan Act signed into law by President Joe Biden on Thursday provides relief for struggling Americans who were facing an unwelcome tax bill because of the unemployment benefits they received during the coronavirus pandemic.
Normally, the federal government treats unemployment benefits as it does most other income. It taxes them.
But the American Rescue Plan makes the first $10,200 in unemployment benefits a person received in 2020 federally tax-free. For married couples who file jointly, each individual receives an exemption on the first $10,200 in unemployment benefits, for a total of $20,400.
Any unemployment benefits above $10,200 (for individuals) and $20,400 (for couples) are still subject to income tax.
The exemption applies to households with adjusted gross incomes of less than $150,000 last year. AGI is generally your income before most deductions. (The income limit is the same for individuals and couples.)
Households with incomes greater than $150,000 must pay income taxes on all their unemployment benefits. There is no phase-out schedule for those making more than $150,000, like there is for the $1,400 stimulus payments also included in the act.
The exemption applies to all unemployment benefits received in 2020, including the extra benefits provided by Congress to assist people who lost their jobs because of the pandemic. It does not apply to any unemployment benefits received after Dec. 31, 2020.
The tax break provides welcome relief for millions of Americans hit hard by the pandemic. Forty million Americans received a total of more than $580 billion in unemployment insurance last year, according to the Century Foundation, a progressive think tank.
The exemption could save a person $1,000 or more, depending on their tax rate, the foundation said.
The IRS has not yet issued guidance on how to claim the exemption, however. So if you have not filed your 2020 tax return yet and you received unemployment benefits last year, you might want to hold off until the guidance is issued.
“It is likely that the IRS will establish a procedure for handling returns with income from UI,” the Century Foundation said. “If you are able to follow that procedure, it will probably speed the processing of your return. So waiting to hear what the IRS announces could actually mean that you get your refund faster.”
If you have already filed your 2020 tax return, you’ll probably have to file an amended return (Form 1040-X) to claim the exemption. But again, you might want to wait until the IRS issues its guidelines.
If you had taxes withheld from your unemployment benefits by the state, you’ll likely receive the exemption in the form of a larger refund.
New York taxpayers will still have to pay state income taxes on their unemployment benefits, unless the state Legislature changes the law to include the exemption.
Rick Moriarty covers business news and consumer issues. Got a tip, comment or story idea? Contact him anytime: Email | Twitter | Facebook | 315-470-3148
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March 13, 2021 at 10:04PM
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Stimulus surprise: You now won’t pay federal taxes on some 2020 unemployment benefits - syracuse.com
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