Unemployment benefits 2020: how to claim the new tax reduction
The $1.9 trillion covid-19 relief bill passed by the Senate includes a provision to make $10,200 of unemployment benefits tax exempt on 2020 tax returns.
When the covid-19 pandemic sent much of the US into lockdown, the economic consequences were dire for many American households. More people were thrown into unemployment than at any time since the Great Depression. Currently there are 9 million few jobs than before the pandemic struck.
To alleviate the hardship, Congress passed the CARES Act last spring which included federal pandemic unemployment programs. Those who benefited from these programs are now contending with the fact that unemployment benefits are taxable just like regular income. Yet in many cases their economic stability has not fully recovered, if at all, and they could be facing a sizable tax bill. An amendment to the American Rescue Plan Act passed in the Senate seeks to address this problem.
What is the tax waiver for $10,200 on unemployment benefits?
A provision added to the $1.9 trillion covid-19 relief bill in the Senate nearly derailed its passage in the upper chamber evenly split 50-50 when Senator Joe Manchin of West Virginia took issue with it. After a nine-hour standoff that held up voting during the marathon vote-a-rama, Manchin was finally convinced by his Democratic colleagues to agree to a compromise.
The agreement would extend the existing $300 weekly unemployment benefit boost, instead of raising it to $400. The pandemic benefits would continue through 6 September, shortening the extension in the provision by a few weeks. But a tax waiver on the first $10,200 in unemployment benefits received in 2020 for households making under $150,000 was kept.
How to apply for the unemployment benefits tax waiver
The tax waiver on up to $10,200 in unemployment benefits is retroactive for benefits received in the 2020 tax year. With tax season under way and households anxious to receive the proposed $1,400 direct stimulus checks in the American Rescue Plan Act, many may have already filed. However it is not too late to claim the tax waiver even though you have already reported the unemployment benefits paid in the 2020 fiscal year.
The covid-19 relief bill still has some final steps before it becomes law. The changes made by the Senate must first be approved in the lower chamber which should happen on Wednesday. Once through the House, the legislation will head to the White House for President Joe Biden’s signature expected in the coming days.
Then the Internal Revenue Service (IRS) will have to update their systems to take into account the change in tax law for fiscal year 2020 tax filings. You would then be able to file an amended tax return to retrieve any money already paid or see if you would have gotten more money back than you did.
It is important to remember that you must file your original tax return and/or pay the IRS before 15 April to avoid any fines, or interest if you underpaid the agency. This includes if you file for an extension to your tax return.
Important: If you received unemployment compensation last year and you already filed your taxes - declaring that income and having to pay on it - you need to file an amended tax return to get the $$ back. #CovidReliefBill #passiton— Stephanie Sigafoos (@ssigafoos) March 6, 2021
Who will be eligible for the 2020 tax-free unemployment benefits waiver?
Jobless benefits have kept numerous households afloat through the pandemic. Around 40 million Americans received some form of unemployment insurance last year, according to a study from Century Foundation. Those benefits included state unemployment insurance and federal pandemic unemployment benefits.
The total amount spent by the federal government on the support is thought to be over $580 billion, if you include the extra weekly $600 payments from the Federal Pandemic Unemployment Compensation (FPUC) programme and the $300 weekly payments provided by the Lost Wages Assistance (LWA).
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