The IRS Just Made More People Eligible for an Unemployment Benefit Tax Break

by Maurie Backman | Updated July 25, 2021 - First published on March 24, 2021

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A woman asking a man questions in a job interview in a casual office setting.

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The new relief bill exempts some unemployment money from taxes, and the IRS is being very flexible with that rule.

The recently signed $1.9 trillion coronavirus relief bill does a lot of good things for jobless workers. For one thing, it puts stimulus checks in their pockets. Many of these $1,400 direct payments have already hit a lot of people's bank accounts. What's more, the bill calls for a $300 weekly boost to unemployment benefits and extends those benefits through early September. Finally, the bill allows for $10,200 of unemployment income to be exempt from federal taxes.

Normally, unemployment payments are taxable, and recipients can have that tax withheld from the start or settle up their tax bills when they file their annual returns. Avoiding taxes on $10,200 of jobless benefits puts a lot more money in millions of people's pockets.

However, that unemployment income exemption does come with a catch -- it's only applicable to people who earned less than $150,000 in 2020. But now, the IRS is making it easier for some jobless workers to enjoy that tax break.

Unemployment income won't count as income

Originally, any jobless benefits that were collected in 2020 were counted for income purposes. So, if someone earned $140,000 from a job and another $14,000 in unemployment, that person would be over the $150,000 limit and wouldn't get the aforementioned tax exemption. Now, the IRS says that jobless workers don't have to count their unemployment benefits when calculating their 2020 income. And this change could help more people fall below the $150,000 threshold to enjoy tax-free treatment of $10,200 in unemployment benefits.

Of course, some might argue that anyone on the cusp of a $150,000 income doesn't need a tax break. But in some parts of the country, a $150,000 income doesn't go as far as one might expect. As such, this added flexibility on the part of the IRS could help a lot of people -- even those whose earnings fall into the moderate-to-high category.

The IRS also recently announced that filers who submitted their 2020 tax returns without accounting for a tax exemption on $10,200 of unemployment benefits don't need to file an amended return. Instead, the agency will attempt to adjust refunds automatically.

The IRS has also extended the tax-filing deadline from April 15 to May 17 in light of the changes in the relief bill. That extra month lets tax preparers reconcile the new rules and gives filers added flexibility during these continuously uncertain times.

That said, filers who can get their tax returns completed before May 17 should do so. Most people who file taxes are due a refund, and the sooner returns are sent in, the sooner the IRS can process those payments. The agency hasn't said anything about refund delays this year, but seeing as how it's busy doling out stimulus payments, it wouldn't hurt for filers to get their tax returns into that refund queue.

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