Update: Most Unemployment Benefits Won’t Be Taxed; IRS Will Issue Automatic Refunds
Last updated March 23, 2021
The $1.9 trillion COVID stimulus package provides a tax break for the millions of Americans who received unemployment compensation last year.
For tax purposes, unemployment compensation is considered income, so it’s taxable. But Congress provided a one-time exemption in the American Recovery Relief Act, which President Biden signed into law on March 11.
Taxes are waived on the first $10,200 in unemployment benefits for individual taxpayers, and up to $20,400 for married couples filing jointly who had an adjusted gross incomed (AGI) of less than $150,000 for 2020. If you made more than that, you do not qualify for this tax forgiveness.
This pandemic-related exemption should significantly reduce the tax bill—by thousands of dollars, in some cases—for more than 40 million Americans, according to IRS estimates.
The IRS website explains how this new, one-time exclusion works:
- If your modified adjusted gross income (AGI) is less than $150,000, the American Rescue Plan enacted on March 11, 2021 excludes from income up to $10,200 of unemployment compensation paid in 2020, which means you don’t have to pay tax on unemployment compensation of up to $10,200.
- If you are married, each spouse receiving unemployment compensation doesn’t have to pay tax on unemployment compensation of up to $10,200. Amounts over $10,200 for each individual are still taxable.
- If your modified AGI is $150,000 or more, you can’t exclude any unemployment compensation.
Internal Revenue Service Commissioner Charles Retting says taxpayers who already filed their 2020 return should “absolutely not file an amended return at this time.”
“We‘re sensitive to the situation people are in,” Retting told Congress last week. “We believe we will be able to handle this on our own. We believe that we will be able to automatically issue refunds associated with the $10,200.”
Taxpayers expecting refunds will get their first checks soon after their return is processed, he said. A second check will be issued once the IRS calculates the exemption on the unemployment compensation.
In his Congressional testimony, Retting discussed the “huge problem” caused by the theft of billions of dollars in unemployment benefits by identity thieves. The states who paid these bogus claims mailed 1099-G tax forms to the fraud victims, because hackers used their names and addresses.
As we reported earlier this month, states have been sending out corrected 1099-G forms, but many victims are still waiting.
“If any individual receives a 1099-G and it does not reflect the right amount that the individual received in unemployment compensation, the individual should only report the unemployment compensation they received,” Retting said.
Remember: The tax filing deadline is now May 17, but the deadline is still April 15 for those who make quarterly income tax payments. To speed up your refund, file electronically and request direct deposit.
Contributing editor Herb Weisbaum (“The ConsumerMan”) is an Emmy award-winning broadcaster and one of America's top consumer experts. He is also the consumer reporter for KOMO radio in Seattle. You can also find him on Facebook, Twitter, and at ConsumerMan.com.