Here’s how the $10,200 unemployment tax break in Biden's COVID relief plan works
The break applies to this tax-filing season, which began Feb. 12 and ends May 17
Millions of Americans who collected unemployment aid last year got a welcome 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.
The break applies to this tax-filing season, which began Feb. 12 and ends May 17, the Internal Revenue Service said Wednesday.
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.
WHEN WILL THE EXTRA $300 IN UNEMPLOYMENT BENEFITS BEGIN?
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.
Goldman Sachs economists estimated in a recent analyst note that individuals could owe as much as $50 billion in unanticipated federal and state taxes, potentially forcing consumers to reduce spending and hurting the broader economy. The new law, which passed without a single Republican voting for it, will save Americans an estimated $25 billion, according to The Wall Street Journal.
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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.
About 40 million people collected jobless aid last year, according to The Century Foundation. The average person received $14,000 in 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.