Is Your Unemployment Income Refund Taxable?

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As part of the American Rescue Plan stimulus relief bill that was passed back in March, up to $10,200 in federal taxes on unemployment benefits would be waived for people earning less than $150,000 per year. The IRS has already sent out 8.7 million refunds to the tune of $10 billion, with another 1.5 million refunds expected to go out in August and more to be sent throughout the year.

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How much you receive will depend on how much tax you paid on your unemployment income in 2020. This benefit is a reduction in taxable income, which usually results in a refund of some kind. For reference, the average refund is around $1,600.

The big question for this special type of refund is whether or not the unemployment income needs to be reported on next year’s taxes.

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The answer is no. The reason behind this is that federal refunds are not reported as income on next year’s federal tax return — the amount you should have paid in taxes were already calculated, thus, the refund you are receiving in the first place.

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The big thing to remember here is that this is for the federal tax treatment — you will still need to check how your state treats these types of taxes. Many states do not impose their own tax on unemployment benefits, but others do. Therefore, it will depend on where you live regarding whether any portion of our unemployment income will affect your state tax return.

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Overall, though, if you have already received a refund, this means that the taxes you were due to pay were already taken into account, and the money you receive is anything left over. You will not have to pay additional federal taxes on any refund you receive, nor will you have to report this specific refund as taxable income on next year’s tax return.

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Last updated: August 26, 2021

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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. 

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