The American Rescue Plan includes a $10,200 tax break for individuals who claimed unemployment benefits in 2020. Here’s what you need to know.
Taxes are already a headache, but if you claimed unemployment in 2020, you might also have a heart attack after reporting benefits as yearly income on your federal tax return. Luckily, congress considered this when they passed the American Rescue Plan and included a $10,200 unemployment tax break. Since most restaurant workers were on unemployment for some part, if not all, of 2020 — this tax break is definitely something you want to know about. Here’s what to do if you have or haven’t filed your 2020 federal and state taxes.
What is the unemployment tax break?
The American Rescue Plan includes a tax exemption for those who claimed unemployment in 2020 and made less than $150,000 in gross income. The exemption makes up to $10,200 of unemployment income nontaxable — meaning your refund might be more significant than it would have been otherwise, or you won’t owe as much back. In a typical year, unemployment benefits are taxed as part of yearly gross income, so this provision provides a significant tax break to those who collected unemployment.
How do I get the tax break?
If you’ve already filed your taxes for 2020, don’t worry — you don’t need to file an amended tax return. Instead, the IRS will do the recalculations and automatically refund any overpayment, or apply it to outstanding taxes due. The IRS has declared they are recalculating tax returns in two phases. First, they’re focusing on single taxpayers who are eligible for up to $10,200, then they will process married couples who filed jointly and are eligible for up to $20,400 tax exclusion. Refunds will be issued starting in May and continue through the summer.
For those who have yet to file their 2020 taxes, the IRS worked with software companies, like TurboTax and H&R Block, to help guide you through completing your tax return with this exemption. If you prefer to file your taxes yourself, you can follow their guide here.
It’s important to note that the IRS extended the deadline for Federal taxes from April 15th to May 17th. While many states have followed suit, not all have come out with a tax extension. Make sure to check in with your state tax deadline.
Does the tax break apply for both federal and state taxes?
The American Rescue Plan’s tax exemption on unemployment benefits only applies to Federal Taxes. You should check how your state handles unemployment benefits when filing state taxes. Some states like New York and Colorado are taxing unemployment benefits as usual. Other states like Texas and Washington didn’t tax unemployment, to begin with (for various reasons). And then, there are states like Oregon and Illinois that are following the American Rescue Plan and exempting up to $10,200.
Tax season can create a lot of anxiety regardless of experiencing a pandemic or not. The unemployment tax break passed in the American Rescue Plan is a huge lifesaver for those in the restaurant industry who claimed and continue to claim unemployment benefits. Right now, every penny counts. Stay up to date on any changes by visiting the IRS website, where they frequently release reports on handling these changes.