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Did You Receive Unemployment Benefits?

New Law Provides Tax Relief for Jobless Benefits

Dan Pilla
Pilla Tax Academy

During 2020, and now into 2021, over 70 million people received both federal and state unemployment benefits into the hundreds of billions of dollars. That means tens of millions of Americans were poised to be blindsided by IRS bills they would never see coming. The reason? Most people don’t know—and only find out the hard way—that unemployment benefits are taxed by the IRS as ordinary income. This means you would owe income taxes on the benefits. While some states don’t tax unemployment comp, the federal government most certainly does.

That’s the bad news.

The good news is that much of the surprise will be mitigated by a provision of the new COVID relief law. On Thursday March 11, President Biden signed the so-called American Rescue Plan into law. The new law represents another massive federal bailout, not just for individuals impacted by the COVID crisis, but for state and local governments, as well as union pension plans.

Among the benefits for individuals is a provision to exempt from taxation a portion of unemployment benefits. The law provides that up to $10,200 of jobless benefits are not taxed if one’s modified adjusted gross income is less than $150,000. The $150,000 cap is computed without considering unemployment comp.

Based on this, if your combined federal and state benefits are under $10,200, you will owe no taxes on those benefits. If they exceed $10,200, you will owe tax only the portion that exceeds $10,200. The amount of tax you ultimately owe is controlled by your tax bracket. I recommend you calculate this as soon as possible to make payment arrangements if necessary.

As of this writing, millions of people who received unemployment compensation in 2020 have already filed their 2020 tax returns. Those people would have claimed the 2020 benefits as income and paid that tax based on that income. And that was the right thing to do, since the law up this point has been that such benefits are taxable.

However, not only did the American Rescue Act change that rule effective for 2021, but it applies retro actively to 2020. That means any jobless benefits you received in 2020 are likewise no longer taxable, up to the cap.

Because of that, if you already filed your 2020 tax return claiming jobless benefits as income, you need to file an amended return as soon as possible. You file an amended return by submitting IRS Form 1040X. You have three years from the date of filing the original return in which to submit the amended return. But why wait? The sooner you file, the sooner you’ll get your money back.

An amended return will help you in either of two ways. First, if you already paid the tax in full, you’ll get a refund based on the reduction of income. Second, if you currently owe money to the IRS for 2020 because of an underpayment attributable to the jobless benefits, an amended return will reduce (perhaps eliminate) what you owe, including interest and penalties the IRS would otherwise charge.


For more information and resources, please visit my website at www.pillataxacademy.com

Pilla Tax Academy

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