Covid-19 Tax Changes for the Unemployed in 2021

Unemployed in 2020? Here are your key tax breaks

Tens of thousands of Americans faced employment changes during 2020 due to the pandemic. From becoming unemployed, working from home, retiring early, becoming self-employed, or working multiple jobs. Millions collected unemployment, many for the first time. But what does it mean for income taxes?

Unemployment benefits can be difficult to understand when it comes to taxes – as taxpayers have to opt in to have income taxes withheld, it’s not automatic like when you work for an employer. But the catch is: unemployment benefits withholding are a flat 10% rate and that’s often not enough to cover the taxes you might owe, especially when combined with possible extra federal benefits many received throughout the last year. If you didn’t elect to set up automatic withholdings or withhold enough, then you should set aside a portion of your unemployment benefits or other income to pay your taxes.

But there’s good news! As part of the American Rescue Plan Act of 2021, the relief act that was passed by Congress in March, taxpayers who were unemployed in 2020 are getting a number of tax benefits to ease their financial burdens.

Unemployment benefits tax break

The newest COVID-19 relief bill, the American Rescue Plan Act of 2021, waives federal taxes on up to $10,200 of unemployment benefits an individual received in 2020. That number can be as much as $20,400 for Married Filing Jointly taxpayers if each received benefits. This is a federal tax break and may not apply to state tax returns.

Do I qualify for the unemployment benefits tax break?

Individuals who received unemployment benefits in 2020 should receive a Form 1099-G showing their total compensation in Box 1. 

This tax-exempt benefit is available only for individuals who made less than $150,000 in 2020, regardless of whether filers are single or married and filing jointly.

Many taxpayers already filed their 2020 income taxes before this new legislation passed. As a result, in late March 2021, the IRS announced that they would begin to take steps to automatically refund money this spring and summer to those who already reported the full unemployment compensation amount before the recent change was made by the American Rescue Plan. The first refunds are expected to be made in May 2021 and will continue into the summer.

The IRS is determining the correct taxable amount of unemployment compensation tax. Any resulting overpayment of tax will be either refunded or applied to another outstanding tax owed. Taxpayers will NOT have to file an amended return to be eligible for this newest benefit unless the calculations make the taxpayer newly eligible for additional federal credits and deductions not already included on the original tax return.

“Free” COBRA Health Care Benefits for 6 Months

The American Rescue Plan of 2021 also includes a requirement that employers treat COBRA coverage from certain individuals as “paid in full” for the period between April 1, 2020, and September 30, 2020. 

The eligible individuals with COBRA coverage will not receive the subsidy directly from the government; rather, they will have a premium holiday during which time the employer pays 100% of the applicable COBRA premium. The employer will be reimbursed in full through refundable payroll tax credits. COBRA gives you and your family, who are losing employer health care coverage, the right to retain their health care coverage.

What do I need to do to qualify for free COBRA benefits?

If you received COBRA benefits between April 1 and September 30, then there’s nothing you need to do. The amount that would have been owed has been passed to your employer and they will receive a federal tax credit to offset the cost.

About the Author

Mark Steber is Senior Vice President and Chief Tax Information Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.

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