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Tax season is fast approaching — and recipients of unemployment benefits in 2021 don’t appear to be getting a tax break like they did for 2020.
Unemployment benefits generally count as taxable income. The American Rescue Plan Act, a relief law Democrats passed in March last year, authorized a waiver of federal tax on up to $10,200 of benefits per person for 2020. Many states offered relief, too.
Households qualified for the federal waiver if their income (minus benefits) was under $150,000.
Congress hasn’t passed a law to offer a similar tax break for 2021 benefits and doesn’t seem poised to do so.
This means households that didn’t withhold federal tax from benefit payments (or withheld too little) may owe a tax bill or get less of a refund this season to make up the difference.
In 2020, the Covid-19 pandemic led the U.S. unemployment rate to spike to its highest level since the Great Depression. Roughly 40 million people got benefits that year, collecting $14,000 each, on average, according to The Century Foundation. However, less than 40% of payments had taxes withheld, the group estimated.
It’s unclear how many people received aid last year. Nearly 21 million people received benefits during the week of Feb. 20 alone, which marked the 2021 peak, according to Labor Department data.
However, the U.S. economy and job market have rebounded since then. Claims for unemployment benefits at the end of December had fallen to pre-pandemic levels, a roughly fourfold reduction from the beginning of the year. While there are still about 4 million fewer jobs relative to early 2020, the 4.2% national unemployment rate is at its lowest since February 2020.
The IRS is still processing tax refunds for thousands of households that qualified for the American Rescue Plan tax break. Many people filed their tax returns before President Joe Biden signed the legislation, meaning they overpaid their tax bill.
The agency has identified more than 16 million such taxpayers, who may qualify for a refund or have their overpayment applied to overdue taxes or other debts. The agency issued tax refunds worth $14.5 billion to over 11.8 million households as of Dec. 28. The IRS will continue the process in 2022, focusing on more complex tax returns.
