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If you were unemployed for part, or all, of 2020, your tax bill may decrease thanks to new changes introduced as part of the American Rescue Plan Act.
On Thursday, March 11, President Joe Biden signed the American Rescue Plan Act, which provides temporary relief to many Americans who are struggling to make ends meet as a result of the ongoing economic impact from the coronavirus pandemic.
The Act includes a provision that waives taxes on the first $10,200 of unemployment benefits for individual taxpayers, and double that ($20,400) if you’re married filing jointly.
Below, CNBC Select breaks down the temporary changes to how unemployment benefits are taxed and how to determine if you’re eligible.
Traditionally, unemployment benefits are taxed 10% at the federal level, as well as in some states. You can get ahead of your potential tax bill by opting to have 10% of benefits withheld from your unemployment checks. That said, it’s voluntary and often overlooked when people file for unemployment benefits.
If you didn't elect to withhold 10% of your unemployment benefits, you can be hit with an unpleasant tax bill when it’s time to file your federal and state taxes.
Under a provision in the American Rescue Plan, you can receive a waiver on your first $10,200 of unemployment benefits if you’re an individual taxpayer, or on a combined $20,400 if you’re married filing jointly and both partners received unemployment. This provision would effectively reduce your total amount of taxable income and therefore decrease the amount you owe the federal government.
To qualify, individuals and married couples must have filed for unemployment and have an adjusted gross income (AGI) that’s less than $150,000 in 2020. Unlike stimulus checks and the child tax credit, there is no phase out period. If your AGI in 2020 was $150,000 or greater, you’re not eligible for the unemployment tax waiver.
If you are eligible for the unemployment tax waiver but already filed your 2020 taxes before Congress passed the latest stimulus measure, you may need to be patient. The IRS website states that people in this boat should not file an amended return, but rather wait for further guidance. Online tax filing companies are awaiting guidance from the IRS so they can update their software.
Taxes are due on May 17. If you haven't filed your 2020 tax returns yet, start soon. To make the process simple, consider filing your taxes with one of the best online tax filing programs.
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