Was Unemployment Taxable in 2021? The $10,200 Exclusion

Unemployment benefits provide temporary financial assistance to individuals who have lost their jobs. These benefits serve as a bridge during periods of joblessness, helping recipients cover living expenses while seeking new employment. Understanding the tax implications of these payments is important for proper financial planning and compliance.

General Taxability of Unemployment Benefits

Unemployment benefits are generally considered taxable income at the federal level. This means payments received from unemployment compensation programs are subject to federal income tax, similar to wages earned from employment. The Internal Revenue Service (IRS) requires recipients to include these payments in their gross income when filing their federal tax returns.

State unemployment agencies issue Form 1099-G, “Certain Government Payments,” to individuals who received unemployment compensation during the year. This form details the total amount of benefits paid in Box 1 and any federal income tax withheld in Box 4. While taxes are not automatically withheld, recipients have the option to request federal tax withholding or make quarterly estimated tax payments to avoid a large tax bill at the end of the year.

The 2021 Federal Tax Exclusion

The American Rescue Plan Act of 2021 introduced a one-time federal tax exclusion for unemployment benefits received in 2020. This provision allowed eligible taxpayers to exclude up to $10,200 of unemployment compensation per person from their gross income. The exclusion was specifically for the 2020 tax year, meaning benefits received in 2021 or later generally did not qualify for this special exemption.

To qualify for this exclusion, a taxpayer’s modified Adjusted Gross Income (AGI) had to be less than $150,000, regardless of their filing status. For married individuals filing jointly, each spouse could exclude up to $10,200 of unemployment benefits if they both received them and their combined modified AGI was below the $150,000 threshold. The $10,200 limit applied individually to each recipient, not jointly to the tax return itself.

This exclusion applied to various types of unemployment compensation, including regular state unemployment insurance benefits, Pandemic Unemployment Assistance (PUA), Pandemic Emergency Unemployment Compensation (PEUC), and Federal Pandemic Unemployment Compensation (FPUC). The purpose of this temporary measure was to provide financial relief to individuals impacted by job losses during the pandemic.

Reporting Unemployment Benefits on Your Tax Return

Properly reporting unemployment income on a federal tax return involves using Form 1099-G, “Certain Government Payments.” This form is typically mailed by the state unemployment office or made available online by January 31 of the year following the benefits’ receipt. It is important to review the accuracy of the Form 1099-G, especially Box 1, which shows the total unemployment compensation paid.

Unemployment compensation is generally reported on Schedule 1 (Form 1040), “Additional Income and Adjustments to Income,” specifically on Line 7. For the 2020 tax year, when the $10,200 exclusion was applicable, the excluded amount was typically calculated and entered as a negative amount on Line 8 of Schedule 1, thereby reducing the taxable portion of the unemployment benefits.

State Tax Considerations

State tax laws regarding unemployment benefits operate independently of federal tax laws. This means that the federal $10,200 exclusion for 2020 unemployment compensation did not automatically apply to state income taxes. States vary in how they treat unemployment benefits for tax purposes.

Some states fully tax unemployment benefits, while others adopted the federal exclusion fully or partially. A few states do not tax unemployment benefits at all, including states without a state income tax and some that specifically exempt these benefits, such as California, Montana, New Jersey, Pennsylvania, and Virginia. Taxpayers should consult their specific state’s tax department website or a state tax professional to understand the applicable rules for their state of residence.