Millions of Americans who collected unemployment aid last year get a tax break in President Biden’s $1.9 trillion coronavirus relief plan.
The American Rescue Plan, signed into law one week ago, waives federal income taxes on up to $10,200 in 2020 unemployment insurance benefits for individuals who earn less than $150,000 a year, potentially saving out-of-work Americans thousands of dollars from a surprise tax hit.
It’s unclear whether states that count unemployment benefits as taxable income will waive the levy this year too and adhere to federal guidelines. Alabama, California, Montana, New Jersey, Pennsylvania and Virginia are the only ones to completely exempt it.
If you already filed your taxes, the IRS recommends not filing an amended return to claim the break; the agency said last week it will issue forthcoming guidance about what to do.
The federal government and most states count unemployment benefits, including the extra money distributed through federal aid programs, as taxable income. But unlike a typical paycheck, taxes aren’t automatically deducted from jobless aid, creating a potential for refund shock for millions of out-of-work Americans, even though they lost their job.
You do not have to pay Social Security and Medicare taxes on your unemployment benefits.
For married couples, each spouse can exclude up to $10,200 of their benefits, meaning their joint taxable income would be reduced by a maximum of $20,400. Any amount over $10,200 for individuals is still taxable. But the only eligible people are those who earn $150,000 or less, regardless of filing status, such as whether they’re single or married.
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