History is unlikely to repeat itself when it comes to the recent tax break for unemployment insurance, so people on the dole this year should be prepared to pay taxes on their jobless benefits either now or later.
Although unemployment benefits are considered taxable income, Congress made an exception last year as record numbers of people filed jobless claims during the pandemic. In the absence of any current legislation to extend that break another year, however, tax planners say people should start paying now or begin saving to pay come tax season. (Sen. Dick Durbin, who with Rep. Cindy Axne proposed the first bill to exclude some unemployment income from taxation, did not respond to a request for comment on whether similar legislation was planned for 2021.)
Between March 15 and August 15, 2020, more than 52 million jobless claims were filed, representing almost 36% of the workforce whose employers participate in the unemployment insurance system. To help people out, Congress in March passed the American Rescue Plan, which allowed individuals and married couples to exclude up to $10,200 of jobless benefits from taxable income if the taxpayers’ modified adjusted gross income was less than $150,000.
Even though the number of people applying for jobless benefits has shrunk significantly this year as the economy reopens, millions are still on the unemployment rolls. In the week ended June 19, the Bureau of Labor Statistics said 14.2 million people filed for unemployment benefits, down from 33.2 million the same week last year.
“Unlike ‘regular’ tax withholdings, there is no automatic tax withholding for unemployment benefits,” said Mark Steber, chief tax information officer at Jackson Hewitt Tax Service, in an email. “This means taxpayers must opt in or elect to have taxes withheld from their unemployment benefits.”
Federal law allows recipients to voluntarily choose a flat 10% withholding from jobless benefits to cover part or all of their tax liability. Taxpayers must complete a voluntary withholding form and give it to the agency paying their benefits. But Steber warned that 10% often is not enough to meet tax liabilities at the end of the year. One way around that is to determine how much you need to set aside for taxes, and then start saving for tax season or send additional money to the IRS using quarterly estimated tax payments.
Have a question, comment, or story to share? You can reach Medora at email@example.com.