Unemployment benefits are taxed, but not stimulus checks. Unemployment benefits were one of the most difficult components of the 2020 tax file. Although these payments are generally taxed, Congress temporarily modified the regulations when tens of millions of Americans lost their jobs as a result of the epidemic and applied for unemployment benefits. On March 11, 2021, the American Rescue Plan Act of 2021 was enacted into law, exempting up to $10,200 in unemployment benefits from taxes in 2020 – after many people had already submitted their tax returns.
However, this exemption does not apply to unemployment benefits beginning in 2021, and those payments will be fully taxed when you file your tax return this year.
Stimulus Checks Are Not Taxable
For 2021, the usual rules apply: Unemployment benefits will be taxed as ordinary income (like wages) in 2021, although they will be exempt from Social Security and Medicare taxes. In January, your state unemployment division should send you Form 1099-G, which details the entire amount of unemployment compensation you got in 2021. When you submit your federal income tax return, include this information on Schedule 1 of your 1040 form. The amount of money withheld from your benefits for federal and state income taxes, if any, is also shown on Form 1099-G, which you must disclose on your return.
When you apply for benefits, you can request that taxes be deducted from your payments, or you can file IRS Form W-4V, Voluntary Withholding, with your state unemployment office. For federal income taxes, you can only have 10% of each payment deducted from your unemployment benefits. It’s entirely up to you whether or not you want taxes deducted from your benefits. For stimulus checks, the tax position is different. Stimulus checks, sometimes known as “economic impact payments,” were never taxable since they were deemed an advance payment of an income tax credit.
