For those who received unemployment benefits in 2020, a $10,200 tax exemption was added as part of the American Rescue Plan. It can be a little unclear on how the tax break might work. For UI recipients whose 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. The IRS says it will handle the exemption and send out refunds if needed.
The agency made an update to the unemployment benefits tax exemption in the latest stimulus bill on March 31, saying it will recalculate taxes for people who received unemployment compensation in 2020 and already filed their tax returns.
According to the Bureau of Labor Statistics, 23 million Americans filed for unemployment due to the coronavirus pandemic last year. Under the Pandemic Unemployment Assistance (PUA) created under the CARES Act last March, this included those who were laid off from their job as well as gig workers, contractors, and self-employed people who don’t normally qualify for unemployment insurance.
The way it works
If the IRS determines the taxpayer is owed a refund, they will automatically be sent a check.
Refunds will start in May and extend into the summer months. There is no need to file an amended return to claim the exemption.
Unemployment recipients should receive a Form 1099-G from their State Unemployment Agency showing the amount of unemployment compensation that was paid which will help determine eligibility for the tax benefit.
The good news is that the federal income tax filing due date for individuals for the 2020 tax year has been automatically extended from April 15, 2021, to May 17, 2021. So, we all have a little extra time to file our taxes.
