Personal Finance

Tax season is here. Don’t expect a refund for unemployment benefits

Key Points
  • Tax season started Jan. 24 and runs through April 18. A tax break isn't available on 2021 unemployment benefits, unlike aid collected the prior year.
  • The federal tax code counts jobless benefits as taxable income.
  • The American Rescue Plan Act had waived federal tax on up to $10,200 of benefits collected in 2020. The measure applied per person, for households with income less than $150,000.
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Tax season is officially here. And those who collected unemployment benefits in 2021 may be in for an unwelcome surprise.

While a federal tax break on jobless benefits was available during last year's tax season, the same isn't true this year.

Since unemployment benefits count as taxable income, recipients who didn't have tax withheld from their unemployment payments (or didn't have enough withheld) in 2021 may owe money to the IRS or get a smaller-than-expected tax refund.

The American Rescue Plan Act, a pandemic relief law, waived federal tax on up to $10,200 of unemployment benefits per person collected in 2020, a year in which the unemployment rate spiked to levels unseen since the Great Depression.

Households qualified for the federal waiver if their income (minus benefits) was under $150,000.

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However, Congress hasn't approved a similar tax break for 2021 benefits — which may surprise taxpayers when they file their income tax returns. Tax season starts Jan. 24 and runs through April 18.

Approximately 25 million people collected jobless benefits last year, according to Andrew Stettner, a senior fellow and unemployment expert at The Century Foundation.

By comparison, roughly 40 million people got benefits in 2020, collecting $14,000 each, on average, according to The Century Foundation. However, less than 40% of payments had taxes withheld, the group estimated.

Of course, Congress could pass legislation during tax season offering a tax break to unemployment recipients. That's what happened last year — Democrats passed the American Rescue Plan Act in March, and has since issued retroactive tax refunds to millions of people who'd filed their returns before the measure became law.

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However, lawmakers don't seem poised to offer another reprieve.

The U.S. economy and job market have rebounded significantly since early 2021. Claims for unemployment benefits at the end of December had fallen to pre-pandemic levels. The national unemployment rate is 3.9%, its lowest level since February 2020.

That's not to say the labor market has fully recovered. Employment is still 3.6 million jobs below its pre-pandemic baseline, and nearly 2.3 million people have left the labor force.