The tax break is part of the US bailout, President Joe Biden’s $ 1.9 trillion aid package that also includes direct payments to Americans in 2021.
A U.S. Department of the Treasury (IRS) 1040 Individual Income Tax with a W-2 pay slip is located in Tiskilwa, Illinois on March 20, 2020.
The unemployment income waiver is the result of a compromise between Democrats and Republicans to pass the package. They agreed to cut weekly unemployment benefits from $ 400 to $ 300, but also to continue the federal boost through September 6 and provide the first $ 10,200 incomes for those unemployed Americans who earn less than $ 150,000 to make tax free.
Brian Galle, a professor at Georgetown Law School, analyzed the ramifications for The Century Foundation, a progressive think tank, examining the nearly $ 580 billion unemployment benefit paid to more than 40 million Americans in 2020.
The Century Foundation study estimates that the average unemployed American received $ 14,000 in unemployment benefits in 2020, so the tax exemption can drastically reduce the amount owed by many families.
Galle notes that people on lower incomes will particularly benefit from this.
“And if you have a huge tax burden that needs to be forgiven, it’s because you’ve been out of work for a really long time,” said Galle. “The greater the benefit of this tax break, the harder the time you probably had in 2020.”
Galle notes that many Americans who are unaware that their unemployment benefits will be taxed may not be prepared for the government’s “surprise bill”.
All Americans who have received unemployment insurance will be provided with a 1099-G form that shows how much the individual or household received in benefits in the 2020 tax year.
The IRS recommends using this form to fill out Form 1040, the standard tax worksheet. On lines 7 and 8 of the form, indicate how much unemployment insurance you and your spouse received and add these numbers together. The total is the amount of “Unemployment Allowance That is Excluded from Your Income”.
During the distribution of Covid-19 in New York on October 17, 2020, people will receive food during a distribution to those struggling with unemployment.
Should those Americans who have already filed taxes without knowing about the $ 10,200 tax exemption file an amended tax return?
“Absolutely not,” said Internal Revenue Service director Charles Rettig on Capitol Hill Thursday.
“We believe we are sensitive to the situation people are in. We believe we will be able to handle this ourselves. We believe that we will automatically get refunds related to the $ 10,200 can exhibit, “said Rettig to the legislature.
This may mean Americans who have claimed the tax break will have to wait for a refund to be eligible as the IRS is working to process a huge backlog. Retting told Congress that he hoped the backlog would be processed by “summer”.
Galle notes that most states will be in line with federal tax law, but he says there are about 12 states that can levy taxes on unemployment benefits, even with federal exemptions.
For example, although many provisions of the American Rescue Plan have been criticized, the tax break is less controversial than the direct payments.
“It’s different from sending checks to every single American – at least that provision is aimed at people who have lost their jobs,” said Adam Michel, senior policy analyst at the Heritage Foundation, a conservative think tank.
Some Republicans, like Senator Rob Portman of R-Ohio, struggled with the move getting included in the US bailout plan. Some opponents said this would encourage Americans to stop working.
“The economy is getting better, and everyone says that when you look at what’s going on in relation to [unemployment insurance]If it’s too high, it’s an obstacle to work, “Portman said.” You want a balanced system in which you encourage people to work. There are so many places in our states that currently work for employers. “
Senator Ron Wyden, D-Ore., A strong supporter of the measure during negotiations in early March, disagreed, arguing that the income waiver protects families struggling during the pandemic.
Ranking member Ron Wyden speaks during a hearing in Washington on January 19, 2021.
“For example, if you were fired from your job through no fault of your own and you are struggling to make ends meet, you don’t have a thousand dollars to pay a surprise tax bill and the party that claims to collect taxes.” You won’t get any relief for working families, “said Wyden.
The provision only applies to the 2020 tax year, although experts like Galle think it makes sense to become permanent.
“That should be permanent as it never made sense to tax unemployment insurance benefits,” said Galle. “We don’t tax SNAP … we don’t tax school feeding programs, and the reason why is because the whole point of the program is to send money to people at a time when they really need it, and it just doesn’t makes no sense to give people money with one hand and take it away with the other. “
ABC News’ Trish Turner and Allison Pecorin contributed to this report.