Although unemployment benefits are taxable, there is some relief under the American Rescue Plan.
A record-high number of Americans were forced to claim unemployment benefits in 2020 due to the coronavirus pandemic, so President Biden implemented the American Rescue Plan to soften the blow on tax returns for this past year.
Although unemployment income is taxable under normal provisions, the American Rescue Plan offers a portion of that income to be counted tax-free.
Here is all you need to know about the American Rescue Plan and unemployment income:
- The first $10,200 is tax-free for earners up to $150k
- Married filing jointly gets you $20,400 tax-free
- If you didn't withhold taxes and are nervous about getting smacked with a large tax bill when filing, this will alleviate it a little bit
- If you filed your 2020 tax return early before the implementation of the American Rescue Plan hoping to get a refund back quickly, you don't have to go back and amend. Be patient -- the IRS will make adjustments and send the money back to the taxpayer.
- The extra $300 people will be receiving until September is taxable income on your 2021 taxes under normal provisions.
- You can voluntarily request to have taxes withheld with the form W4-B on unemployment benefits you're receiving in 2021 so you don't get beat up next year.
"We [TurboTax] have an unemployment center that gives you tips and advice, and we keep up-to-date information on unemployment and the provisions that are occurring," said Greene-Lewis.
The most important thing to remember is that unemployment benefits are taxable, and Greene-Lewis added that she recommends voluntarily withholding going forward for the 2021 tax year if you're financially able.