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The pandemic-induced collapse of the economy in March 2020 meant that many Americans will be filing their 2020 taxes after having received substantial income from unemployment benefits.
Are Unemployment Insurance Benefits Taxed by States and the Federal Government?
Yes. Unemployment insurance benefits are subject to both federal and state taxes. Before 2021, unemployment benefits counted toward your income and were taxed at rates according to the IRS’s tax brackets. The American Rescue Plan Act of 2021 (which most people call the stimulus bill) exempted some of that money from federal income taxes for tax year 2020.
Did the Stimulus Bill Change How Unemployment Is Taxed?
Yes. The American Rescue Plan Act of 2021 changed the tax code so that the first $10,200 of unemployment benefits you received in 2020 is free of federal taxes. That means that only the money you received over $10,200 counts toward your taxable income. For couples filing jointly, each person gets up to $10,200 in tax-free unemployment benefits before they have to start paying federal taxes on that income.
This exemption applies to individual and joint filers who made up to $150,000 in 2020. That number is what’s known as a “hard cliff” that applies regardless of whether you file as single, married or any other filing status. So if your household’s modified adjusted gross income in 2020 was a total of $150,001, you have to pay taxes on all unemployment benefits.
Learn more about the U.S.’ progressive tax system here.
Important: Many states have not followed the federal government’s lead on this. In many states, such as New York, all unemployment benefits are still subject to state taxes. In other states, like California, unemployment benefits are exempt from state tax. And there are some states that simply have no state income tax. Here’s how each state is taxing unemployment in 2021.
I Filed My Taxes Before the Stimulus Bill Was Signed. Do I Have to Do Anything?
No. The IRS will automatically recalculate the amount of taxes due and give you a refund if you overpaid, so long as your overall tax situation stays the same.
The only reason you’d have to file an amended return is if the law makes you newly eligible for a tax break like the Earned Income Tax Credit. If this applies to you, you can file an amended return using Form 1040X.
If I Collected Unemployment, What Paperwork Do I Need to File My Taxes?
States that gave you unemployment benefits should send you a Form 1099-G. This form calculates all the unemployment income you received and tells you how much (if any) was withheld for taxes. This should help you calculate your income when filing your taxes.
What If My 1099-G Form Is Wrong?
According to the IRS, “taxpayers who receive an incorrect Form 1099-G for unemployment benefits they did not receive should contact the issuing state agency to request a revised Form 1099-G showing they did not receive these benefits. Taxpayers who are unable to obtain a timely, corrected form from states should still file an accurate tax return, reporting only the income they received.” The department of labor keeps a directory of each state’s unemployment office and its website.
In some cases, an incorrect 1099-G form might indicate that you have been the victim of unemployment fraud, which has been a growing problem. Here is how to recognize if this has happened to you.
Do I Have to Pay to Prepare My Taxes If I Received Unemployment?
No. If you made under $72,000 in 2020, you are eligible to file your taxes for free (and now, up to $10,200 in unemployment doesn’t count toward that amount). Even if you made more than that, many tax preparation services now include a 1099-G as part of a “simple” tax return, which they will let you file free of charge.
But buyer beware: So-called free tax preparation softwares are often trying to push you to pay them more money.
Can I Have Taxes Withheld From Unemployment Payments?
Yes. State unemployment agencies allow you to have federal and state taxes taken out of your unemployment checks, and the IRS recommends you do this to avoid surprise tax bills. You can set this up when you first apply for unemployment, or at any point while you are receiving it, by filing Form W-4V. Most states allow you to do this online as well, and their unemployment websites are listed on a Department of Labor directory.
If you had federal taxes withheld from your unemployment benefits throughout the year, it’s possible the new $10,200 exemption will make you eligible for a refund. The IRS will automatically calculate this and give you a refund if necessary.
Important: The $10,200 unemployment tax exemption only applies to 2020. If you are receiving unemployment benefits at any point in 2021, setting up a withholding now may save you from a surprise tax bill next year.
Do I Have To Pay Unemployment Back?
No. Unemployment benefits are yours to keep, except for the amount you may owe in taxes. But make sure you’re getting the right amount.
In a few cases that ProPublica found, simple mistakes have led states to overpay unemployment recipients and then demand huge sums of money back. A new bill would shield unemployment recipients from having to repay overpayments made by mistake, but it would only apply to unemployment aid that came directly from the federal government. As of April 2021, the bill is still in committee.
About this guide: ProPublica has reported extensively about taxes, the IRS Free File program and the IRS. Specifically, we’ve covered the ways in which the for-profit tax preparation industry — companies like Intuit (TurboTax), H&R Block and Tax Slayer — has lobbied for the Free File program, then systematicallyundermined it with evasive search tactics and confusing design. These companies also work to fill search engine results with tax “guides” that sometimes route users to paid products. ProPublica’s guide is not personalized tax advice, and you should speak to a tax professional about your specific tax situation.
