In March of 2021, the American Rescue Plan was signed into law, and that bill made a lot of aid available to the public. Not only did it send a third round of stimulus checks into Americans' bank accounts, but it also boosted the Child Tax Credit, whose monthly payments during the second part of 2021 served as a lifeline for many families.
Another thing the American Rescue Plan did was exempt up to $10,200 of unemployment benefits from taxes for the 2020 tax year. That, too, saved jobless workers a fair amount of money.
But while workers were entitled to tax-free unemployment income in 2020, that wasn't the case in 2021. And now, a lot of people who collected jobless benefits last year could be in for an unpleasant surprise when they file their tax returns.
You may owe the IRS money
Unemployment is a taxable income source. Those who collect it get the choice to have federal taxes withheld from their weekly benefits upfront, or collect their benefits in full but pay that tax later on.
Recipients who went the former route in 2021 may not owe much or any money on their taxes now as a result. But those who didn't have tax withheld from their jobless benefits may now have a tax debt on their hands.
About 60% of all unemployment benefits paid in 2021 were not subject to upfront taxes, reports Andrew Stettner to CNBC. Stettner is an unemployment expert at progressive think tank The Century Foundation who analyzed U.S. Department of the Treasury data to come up with that percentage. Because most unemployment recipients opted not to have tax withheld, now's the time they're on the hook for that money.
Now this doesn't automatically mean that you'll owe the IRS money if you collected unemployment benefits last year but didn't pay taxes on them. You may have enough tax credits and deductions to offset that liability, in which case you won't have to send the IRS a check. But if you're left with a deficit after accounting for your various tax breaks, then you may end up having to pay the IRS some amount of money.
What to do if you can't pay your tax bill
If you collected unemployment in 2021 and didn't have your benefits taxed, you may now owe the IRS a lump sum. But don't panic if you can't pay it at once.
If you're unable to pay the IRS the full amount you owe by April 18, which is this year's tax-filing deadline, pay as much as you can immediately to avoid accruing interest and penalties. Then, contact the IRS to get on an installment agreement to pay off the rest of your tax bill.
The IRS commonly works with filers who are unable to pay their tax debts in full. And as long as you stick to the terms of your installment plan, you shouldn't face any harsh consequences, like having your wages garnished.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Maurie Backman has no position in any of the stocks mentioned. The Motley Fool recommends Progressive. The Motley Fool has a disclosure policy.