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Unemployment, Income Taxes and the American Rescue Plan Act of 2021 Explained

  • Discover info to help those who filed for unemployment in 2020
  • The first $10,200 of unemployment benefits paid to each taxpayer will not be taxed thanks to the ARPA
  • The additional $300 weekly payment will continue for unemployment benefits

Like most other types of income, federal and state governments usually tax unemployment income. However, for people who received unemployment income in 2020, this changed slightly with the passage of the American Rescue Plan Act of 2021 (ARPA).  

The Act makes the first $10,200 of unemployment paid to each taxpayer tax-free by the federal government (so long as your modified adjusted gross income is less than $150,000). It also continues the additional payment of $300 each week of unemployment benefits through September 6, 2021. These changes are designed to help those hardest hit by the pandemic and economic downturn by reducing their tax burden and increasing their income. This provides historic assistance for our fellow friends and neighbors who need it most during this time.

How it works

The Act does not change the amount of tax that the taxpayer needs to pay as part of their state income taxes. Some states have made their own temporary changes allowing for decreased or eliminated taxation of unemployment income.

The Act makes the first $10,200 of unemployment paid to each taxpayer tax-free by the federal government.

The Act does not change the amount of tax a taxpayer needs to pay as part of their state income taxes. Nebraska has opted to follow the federal unemployment income tax exemption, which exempts the first $10,200 of unemployment income from being taxed. If you need to file tax returns for multiple states (for example, you live in one state and work in another or you moved to a new state during 2020), you may still need to pay state income tax on a non-Nebraska state tax return. If a taxpayer had their taxes withheld from unemployment income throughout the year, they will get any “extra” money that was withheld back as part of their tax refund when they file their 2020 taxes. 

Unlike most things in the tax code, this benefit does not simply double for taxpayers who file “Married Filing Jointly.”  Instead, the benefit is tied to each spouse.

For example, Amy and Archie are married and file taxes together.  In 2020, Amy, like many Americans, lost her job due to how the pandemic affected the economy. She received $15,000 of unemployment income during 2020.

Archie did not receive any unemployment income in 2020. When Amy and Archie file their 2020 taxes, they will not have to pay federal tax on $10,200 of Amy’s unemployment income, but they will pay federal taxes on the remaining $4,800 of unemployment income. In contrast, Adam and Steve are a married couple who also file taxes as “Married Filing Jointly.”  In 2020, both Adam and Steve were briefly unemployed and each received $10,000 of unemployment income during that time, or $20,000 total.

The Act does not change the amount of tax that the taxpayer needs to pay as part of their state income taxe

Spouses are subject to their own $10,200 of unemployment income that is sheltered from federal tax. Neither spouse had more than $10,200 of unemployment income in 2020, so even though they jointly had more unemployment income than Amy and Archie none of Adam and Steve’s unemployment income is taxed federally.

How tax preparation companies are adjusting to the ARPA

Since the American Rescue Plan Act passed in March 2021, and affects 2020 filings, many people filed their 2020 taxes before this change was made. The IRS is currently working with tax preparation companies on their end to make any corrections needed on taxes that are not filed yet.

The IRS has also issued guidance for how to record the income for those who file their taxes by hand, as opposed to e-filing. For those who have already filed their taxes, the IRS will make the correction(s) needed on their end and adjust the amounts of people’s taxes due or refunds. 

Shailana Dunn-Wall (she/her/hers), Christine A. Brunswick Public Service Fellow and Fellowship Staff Attorney at Legal Aid of Nebraska, is the author of this article.



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