Is Unemployment Compensation Going To Be Tax-Free For 2021?

Closeup of a pencil laying on top of overlapping Form 1099G Certain Government Payouts and W-2 forms.
Darylann Elmi / Getty Images/iStockphoto

Under normal circumstances, income from unemployment insurance is treated as income from a paycheck and subject to federal tax and state taxes where it applies. Unemployment income is also typically considered taxable income and is reported on your tax return as such — from there it depends on your particular state what tax treatment comes along with it. 

See: Child Tax Credit and Stimulus 2021 Recipients: Be on the Lookout for IRS Letter With Tax Filing Info
Find: ‘Tis the Season To Gift Crypto: Taxes and More Variables You Should Consider Before You Commit

Pandemic-era relief laws have changed this temporarily. As of March 11, 2021, under the American Rescue Plan, the first $10,200 in unemployment benefits collected in the tax year 2020 were not subject to federal tax. In order to have qualified for the exclusion, you needed a modified adjusted gross income of less than $150,000. This limit included benefits plus any other sources of income. The exclusion was claimed when filing 2020 taxes during 2021.

Save for Your Future

If you collected any unemployment benefits in 2021 that were meant for 2020, meaning any late accrued payments, you will need to include this on your 2021 tax return during the 2022 filing season. 

Unfortunately, the unemployment income federal tax exemption does not include unemployment income for 2021. This means the only way to still take advantage of the benefit is if you were paid any 2020 unemployment money late, and the payment came to you in 2021 instead of 2020. In this case, you will claim it on your 2021 tax return in 2022, and label it as unemployment income from 2020.

See: How To Gift Your Children A House Without Major Tax Ramifications
Find: How to Leverage Your Marriage to Avoid Paying Gift Tax

In order to do this, you should receive a Form 1099-G from your state or the entity paying your unemployment benefits early next year. Full amounts will appear in Box 1 of the form. When you’re ready to file your taxes for 2021, you will write the amount stated in box 1 of your Form 1099-G on line 7 of Schedule 1. You will need to file Schedule 1 with your tax return.

More from GOBankingRates:

About the Author

Georgina Tzanetos is a former financial advisor who studied post-industrial capitalist structures at New York University. She has eight years of experience with concentrations in asset management, portfolio management, private client banking, and investment research. Georgina has written for Investopedia and WallStreetMojo. 

Untitled design (1)
Close popup The GBR Closer icon

Sending you timely financial stories that you can bank on.

Sign up for our daily newsletter for the latest financial news and trending topics.

Loading...
Please enter an email.
Please enter a valid email address.
There was an unknown error. Please try again later.

For our full Privacy Policy, click here.