Rep. Huffman explains how American Rescue Plan forgives taxes on unemployment benefits

March 13, 2021

NORTH COAST, Calif. — Millions of Americans who found they owed hundreds, or even thousands of dollars in taxes on unemployment benefits they received in 2020 are navigating how the American Rescue Plan will lower their tax bills.

"It's a really confusing and really startling situation," Arcata resident Zachary Lathouris told North Coast News.

Lathouris lost his job shortly after the pandemic hit, and collected unemployment for about 10 months. When he sat down to file his 2020 taxes, he was shocked to find out he owed the Internal Revenue Service more than $1,300 in taxes on unemployment pay.

"I didn't expect to get a big tax return, but I didn't expect to owe $1,300," he said. "Two years ago, it would have taken a couple months of hard work to pay $1,300, right now, I couldn't even fathom paying $1,300 at the moment. It's a matter of survival and principle."

According to The Century Foundation, about 40 million Americans received unemployment insurance benefits in 2020, and fewer than 40% of payments had any taxes withheld. This means millions of people who filed for unemployment in 2020, many of whom remained unemployed a year later, were faced with high tax bills if they filed before President Joe Biden signed the American Rescue Plan into law on Thursday.

"We've been running into this more and more," North Coast Congressmember Jared Huffman said in a virtual one-on-one interview Friday afternoon. "A lot of independent contractors, self-employed people, people who didn't used to be eligible for unemployment benefits are now eligible, and because they haven't been in the system, many of them are surprised to find that unemployment benefits are taxable income, so they're getting a little blindsided."

Huffman said some relief for these Americans was included in the ARP.

"We're creating a special rule for the pandemic through his new law," he said. "It's a one-time thing—I don't think people should count on it in future years—but I think the recognition here is that this has been one heck of a tough time and it's one more way to help folks through the hardship. Also because, frankly, unemployment benefits are really modest, especially in a high-cost place like California."

The $1.9 trillion COVID-19 relief bill forgives taxes on up to $10,200 in unemployment compensation received in 2020 for those who made less than $150,000.

"As they file their tax returns, as long as it's less than $10,200 in unemployment benefits, that is not treated as federal income," Huffman said. "If you've already filed your taxes, you may have to go back and amend if you want the benefit of this new change."

From the IRS:

"If your modified adjusted gross income (AGI) is less than $150,000, the American Rescue Plan enacted on March 11, 2021, excludes from income up to $10,200 of unemployment compensation paid in 2020, which means you don’t have to pay tax on unemployment compensation of up to $10,200. If you are married, each spouse receiving unemployment compensation doesn’t have to pay tax on unemployment compensation of up to $10,200. Amounts over $10,200 for each individual are still taxable. If your modified AGI is $150,000 or more, you can’t exclude any unemployment compensation."


By:  Marissa Papanek
Source: KRCR