The $1.9 trillion American Rescue Plan signed into law this week includes a welcome tax break for unemployed workers. The law waives federal income taxes on up to $10,200 in unemployment insurance benefits for people who earn under $150,000 a year, potentially saving workers thousands of dollars. States that currently tax unemployment benefits have yet to decide whether they will allow those state taxes to be waived as well.
The change is good news for many taxpayers, who could save as much as $25 billion, according to the Wall Street Journal. But it also affects an already complex tax season for a tax collection agency that is already behind thanks to understaffing and pandemic-fueled disruptions.
Wait, unemployment is taxable?
In most years, yes. The federal government considers unemployment benefits to be taxable income, although taxes are not automatically withheld from benefits payments, the way an employer might take taxes out of your paycheck. Instead, unemployment recipients must request that taxes be withheld from their benefits form, and the withholding is limited to 10%.