The American Rescue Plan Act of 2021 has saved the tax season for millions of Americans who received unemployment benefits in 2020. Instead of paying taxes on the full amount of unemployment benefits, the government is allowing eligible taxpayers to treat up to $10,200 of their benefits as tax-free income.
Here are some of the latest updates from the IRS to help you determine if you qualify for the unemployment exclusion and how you claim it on your tax return. This tax waiver could turn around your entire tax situation and put more money in your pockets this year.
How taxes for unemployment benefits usually work
When unemployment checks started pouring in during 2020, many didn’t realize that those benefits were taxable.
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Your state unemployment benefits plus the weekly benefits are taxed as ordinary income by the federal government. Basically, you’re subject to the same taxes you would pay on income earned from working a job, though you do not have to pay Social Security or Medicare taxes. Those are considered payroll taxes that you pay on earned income. You only have to worry about federal income taxes and possibly state income taxes.
To avoid a tax nightmare, there is an option to have taxes taken out of unemployment benefits. But if you missed the memo, you may take a hit during tax…
