That's because the federal government and most states count unemployment benefits, including the extra money distributed through federal aid programs, as taxable income. California, New Jersey, Oregon, Pennsylvania and Virginia are the only ones to completely exempt it.
And unlike a typical paycheck, taxes aren't automatically deducted from jobless aid, creating a potential for refund shock, even though they lost their job. You do not have to pay Social Security and Medicare taxes on your unemployment benefits.
Goldman Sachs economists estimated in a recent analyst note that individuals could owe as much $50 billion in unanticipated federal and state taxes, potentially forcing consumers to reduce spending and hurting the broader economy.
"These surprise tax bills would reduce tax refunds or possibly even require net tax payments for vulnerable households, which may force some to cut back on spending," the economists, led by Jan Hatzius, wrote in the note to investors.
A recent survey conducted by Jackson Hewitt found that 38% of Americans receiving benefits were unaware that the money was taxable – and nearly two-thirds of those individuals had not set aside or withheld money from the payment for their 2020 income taxes. There are roughly 20 million Americans receiving jobless aid, according to new data published Thursday by the Labor Department.
Democrats unveiled a bill at the beginning of February to provide tax relief for the millions of Americans collecting unemployment benefits last year, but it's unclear whether the measure will garner enough support for passage.
Under the proposal, introduced by Sen. Dick Durbin, D-Ill., and Rep. Cindy Axne, D-Iowa, taxes would be waived on the first $10,200 in unemployment benefits that individuals received last year. Americans who received jobless aid through state and federal programs would qualify for the relief, the lawmakers said.
"Congressional Democrats recently proposed tax relief for UI beneﬁt recipients n that would reduce the spending drag if included in the next ﬁscal package," the Goldman analysts said. "Regardless, the additional stimulus checks we expect to be passed — which are not taxed — should more than offset surprise tax bills for most households."
The total amount of income you receive and your filing status will determine whether or not you need to file a tax return.
During past recessions, Congress has passed legislation providing tax relief to unemployed Americans. In 2009, lawmakers waived taxes on up to $2,400 in jobless aid.