Unemployment Benefits Were Tax-Free In 2020. Don’t Expect That In 2021
Millions of Americans lost their jobs during the pandemic, and the damage was especially devastating in the spring of 2020, when weekly jobless claims were filed in the millions.
Recognizing that the public needed help, Congress created the $1.9 trillion American Rescue Plan, signed into law in March 2021, which, among other benefits, boosted unemployment benefits by $300 a week through early September. While many states have decided to end that boost early, in 24 states, it’s still in place. The bill also threw the jobless a tax break, exempting up to $10,200 in unemployment benefits from taxes in 2020.
A lot of people may have gotten a tax refund this year due to that change. Those collecting benefits should be aware that so far, no such rule exists for 2021.
Since the jobless rate has also declined substantially, it’s unlikely that Congress will boost unemployment beyond early September. It’s also somewhat unlikely that lawmakers will decide to let those collecting jobless benefits in 2021 forego paying taxes. Anyone receiving those benefits now should plan to pay the IRS a portion of that money.
Many people collecting jobless benefits must live paycheck-to-paycheck, so parting with a portion of that income may not be easy. But those who don’t pay taxes up front will most likely have to pay them eventually, and planning for that could save you less financial stress this spring.
Source: Motley Fool