Tax Week: Unemployment Benefits and Your Tax Return
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Here's your Money Briefing for Thursday, March 11th. I'm J.R. Whelan for The Wall Street Journal. All this week, we're looking at important tax issues that you should have on your radar as you pull together forms and paperwork ahead of April 15th. Today, we're talking about unemployment benefits. For many Americans, those payments were the only source of income for much of last year to do things like pay the rent and buy groceries. And yes, that money is taxable. But there's a provision in the new federal COVID-19 relief package that affects how unemployment is taxed. The rule change could benefit millions of people who lost their jobs last year, but it could also mean headaches for some others.
This is an unusually late tax change because it's affecting the tax year for which people have already filed. More than 40 million returns already in at the IRS's at the end of February.
So what can taxpayers expect? Our tax reporter Richard Rubin will have the details after the break.
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What tax issue is this episode introducing about unemployment and the COVID relief bill?
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As Americans start pulling together receipts and paperwork for their tax returns, this year many more than usual will have to account for unemployment benefits. A record number of jobless claims were filed in 2020. Normally, unemployment benefits are taxable, but the new COVID-19 aid package exempts a big chunk of that for many people. Our tax reporter Richard Rubin has been running the numbers and he's here with us to discuss. Rich, thanks for joining us again this week. Sure. Thanks for having me. So let's first talk about the provisions that were included in the new COVID relief plan because this is a big change. How much of someone's unemployment benefits would be tax exempt under this?
So it's the first $10,200 of unemployment benefits per spouse. only for households where the adjusted gross income was under $150,000. And this is for tax year 2020, not tax year 2021.
And just to be clear, this includes state benefits and the bonus payments the federal government has paid out?
Yes. Basically, this will be, once President Biden signs it, the new federal rule, the federal law for how these are treated for federal tax purposes. There's a separate set of questions in a bunch of states about what happens for state tax purposes. So this is the federal tax rule for state and federal benefits, and then it's going to depend on what your individual state does and how it treats these benefits for what happens on the state income tax side.
So how do people find out how much in taxes they will wind up owing on their unemployment benefits?
So the way this normally works is you get a form called the 1099-G from your state government that will show how much you received in benefits. That's the same form they used for state income tax refunds, and this will help. show you what's there in terms of taxable benefits. And what you're supposed to do with that in a normal situation is then put that as income into your tax return.
But this tax exemption comes pretty late in the tax season.
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