Many don’t know it, but unemployment benefits, including those extended by the pandemic, are taxable.
Thanks to provisions enacted under the Biden Administration’s “American Recovery Plan,” many recipients of unemployment benefits will not have to pay taxes to the IRS in certain cases.
Although many do not know it, unemployment benefits are taxable income and are subject to both state and federal taxes. This includes pandemic fringe benefits such as Pandemic Unemployment Assistance (PUA) and Pandemic Emergency Unemployment Compensation (PEUC). However, many do not comply with these tax provisions primarily due to lack of knowledge, leaving them in debt to the Internal Revenue Service (IRS).
The $1.9 billion stimulus package passed this month in the U.S. Congress provides for a waiver of the IRS liability if certain requirements are met.
Who is exempt from paying taxes to the IRS for unemployment assistance?
The new law established not only an extension of the $300 weekly federal unemployment assistance until next September, but also determined that taxpayers who received the assistance because they were out of work in 2020 will not have to pay taxes on the first $10,200 of benefits for individuals earning less than $150,000 a year.
In the case of married couples, in guidance on the new exclusion the IRS states, “If you are married, each spouse receiving unemployment compensation is not taxed on unemployment compensation up to $10,200. Amounts in excess of $10,200 for each individual are still taxable. If your AGI is $150,000 or more, you cannot exclude unemployment compensation.
The exception applies during this tax season, which ends May 17, after the IRS extended the tax filing deadline.
In the case of state taxes, some states such as Alabama, California, Montana, New Jersey, Pennsylvania and Virginia have already decided to exempt citizens from the obligation to pay for unemployment funds received.
But in this area, it is up to each state to decide whether or not to apply the exemption.
A recent Jackson Hewitt poll found that 38% of Americans who receive these benefits are unaware that the money is taxable.
Some 40 million Americans collected unemployment benefits last year, according to statistics from The Century Foundation. On average, the unemployed received $14,000 in benefits.