In March 2021, President Joe Biden signed into law an economic stimulus bill called the American Rescue Plan Act (“ARPA”). The law includes a special federal tax break for workers who received unemployment benefits in 2020: the first $10,200 ($20,400 if married and filing jointly) of unemployment compensation is not taxable. This benefit applies to households with income of less than $150,000 (excluding unemployment benefits) in 2020. See LR’s What You Need to Know Now postings here, here and here discussing ARPA’s health benefit and multiemployer pension plan provisions.

The Internal Revenue Service (IRS) has updated an online worksheet, providing guidance on how to calculate and report this exclusion when filing your taxes. If you filed your taxes for 2020 before this benefit was announced, and reported your unemployment benefits as taxable income, the IRS will issue you an automatic refund. The IRS will begin issuing refunds in May and the refunds will continue through the summer. The IRS advises that you don’t have to file an amended return unless the exclusion changed your income so that you are now eligible for credits or deductions you didn’t claim on your original return, such as the earned income tax credit, but consult your accountant or tax preparer for guidance.

The ARPA’s $10,200 tax break only applies to federal income taxes. You may still be required to pay state taxes on your unemployment compensation. For example, New Jersey does not tax unemployment benefits, whereas New York does. However, some states that usually tax unemployment compensation have made exceptions in light of the federal legislation and plan to exempt some amount of unemployment compensation from state taxable income for 2020. The New York legislature introduced a bill on March 31 that would exclude up to $10,200 of unemployment compensation from state taxable income.   

Tax laws can be complicated and you may want to speak with your accountant or tax adviser about how the new law affects you.