President Joe Biden signed the $1.9 trillion American Rescue Plan into law on Thursday, welcome news for the millions of jobless Americans collecting enhanced unemployment benefits that had been set to expire on March 14.
The new law will not only extend supplemental benefits for the unemployed, but it will also give them a tax break — in addition to providing third stimulus checks, additional funding for COVID-19 vaccine distribution and other provisions. Here’s everything you need to know about the changes to unemployment benefits.
What will the extended unemployment benefits look like?
The plan provides for the continuation of the $300 weekly enhanced unemployment benefits included in the last relief package, despite the House initially passing a version of the bill that upped the amount to $400.
The bill will also extend the Pandemic Unemployment Assistance (PUA) and Pandemic Emergency Unemployment Compensation benefits (PEUC) initially included in the CARES Act through Sept. 6 — they were set to expire March 14 after being extended in the last relief package. Under PUA, freelancers, gig workers and self-employed business owners who previously weren’t eligible for unemployment benefits were able to qualify. PEUC provides eligible unemployed people with extended benefits once they’ve exhausted their state benefits. Those covered by the temporary programs, as well as traditional state unemployment benefits, will continue to receive the additional weekly $300 until the Sept. 6 expiration date.
What is the tax break for the unemployed?
Unemployment benefits are considered taxable income, but the new law provides a tax break: those receiving unemployment benefits will not need to pay federal income taxes on the first $10,200, as long their 2020 adjusted gross income was less than $150,000. For married couples in which both spouses collected unemployment benefits and their combined income is less than $150,000, experts say federal income taxes could be waived for up to $20,400 of benefits.
This change only applies to 2020 (the taxes you’ve likely already filed, or plan to do soon), and comes as many have been hit with a surprise tax bill for their benefits.
“If you've never had unemployment benefits before, you may not know that you owe income tax on them,” says Joe Bishop-Henchman, vice president at National Taxpayers Union Foundation. “Obviously in 2020, many people had to take unemployment benefits for the first time.”
While people collecting unemployment benefits can opt to withhold 10% from those benefits to cover some or all of their tax liability, fewer than 40% of unemployment insurance payments in 2020 had taxes withheld, according to a research paper published last month by The Century Foundation. Some states didn’t withhold the 10%, even for those who asked them to, CNBC reported.
The combination of some recipients not knowing the rule and others not being able to pay their taxes as they went along means millions of people could have faced tax bills as high as $3,000, says Brian Galle, a law professor at Georgetown University and co-author on the research paper.
Those most likely to have been hit with a surprise tax bill are — in addition to those who didn’t withhold — those without children to claim as dependents or those who usually get a refund or owe just a small amount, as they’re likely not eligible for other tax credits, says David Marzahl, a consultant with Commonwealth, which works to improve financial security for low income households. Others who have withheld all along could now get a refund when, Galle says.
It’s unclear how this will work for people who have already filed their 2020 taxes and paid taxes on their unemployment benefits. Experts hope the IRS can make the change internally and automatically, but it may require people to file amended returns. In a statement, the IRS said that those who received unemployment benefits last year and have already filed their 2020 tax return should not file an amended return until the agency issues additional guidance.
If taxpayers with unemployment benefits haven’t yet filed, it might make sense to hold off until the dust settles, Marzahl says. (Just keep in mind that if your income dropped in 2020, filing ASAP could help you snag a larger stimulus check.)
This story has been updated to reflect that President Joe Biden signed the American Rescue Plan into law, and to include guidance from the IRS.