Are your UNEMPLOYMENT Benefits TAXABLE?

Relief for Jobless Benefits

President Biden is expected to sign the so-called American Rescue Plan tomorrow. The law represents yet another massive 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 a portion of unemployment benefits from taxation. What most people don’t know—and only find out the hard way—is that unemployment benefits are taxed as ordinary income. This means you owe tax on the benefits. While some states don’t tax unemployment comp, the federal government most certainly does. 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. Some of that surprise will be mitigated by a provision of the new bail-out law. 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. If your combined federal and state benefits exceed $10,200, you will owe tax on the overage based on your tax bracket. I recommend you calculate this as soon as possible to make payment arrangements if necessary.