With hiring at seemingly record highs, many states are rolling back or adding stipulations if out-of-work Americans want to continue to receive the enhanced unemployment benefits made possible by the American Rescue Plan. As you may recall, these enhanced benefits are set to last through early September for qualifying Americans.
As a result of this hiring surge and the challenge to fill jobs, there’s another American Rescue Plan benefit that’s likely to be discontinued as well: the unemployment benefits tax break. As we’ve covered in the past, yes you have to pay taxes on unemployment benefits. Fair or not, those are the rules. But the American Rescue Plan waived federal taxes on up to $10,200 of unemployment benefits collected in 2020, something that certainly helped out Americans who found themselves out of work for an extended period of time. But financial experts are warning Americans not to bank on another tax break this year.
Unemployment Aid: 2020 vs. 2021
While we don’t yet know how many Americans benefited from the tax break on unemployment benefits, we do know that about 40 million Americans were on jobless aid at some point in 2020. Keep in mind that during the early days of the pandemic, when shutdowns were ordered to curb the infection rate, unemployment skyrocketed into double digit figures. Presently, however, the unemployment rate is under 6 percent, and jobs have continued to be added month over month in 2021 as vaccines have become available and cases have declined.
As a result, there’s more jobs right now than there are people to fill them – something that has led many states to prematurely end enhanced unemployment benefits or require those claiming benefits to be actively searching for work to continue to qualify. Officials are hoping that the lack of another tax break on benefits is another motivating factor to getting people back into the workforce.
How to Plan
Certainly, not everyone that is currently out of work will be able to re-enter the workforce on their own free will – and that’s where things may get a little dicey moving forward. Without a tax break on unemployment benefits, many Americans on long-term unemployment may be staring at a hefty tax bill when they go to file their 2021 income taxes. In order to prevent owing money to Uncle Sam, there are a few steps to take now:
- Elect to have 10 percent of tax withheld on unemployment benefits if you are able to.
- If you can afford it, make quarterly estimated tax payments. This could prevent you from owing a significant lump sum come tax time.
- If you qualify for the enhanced child tax credit, set some of this money aside to offset any potential tax bill.
Don’t bank on another unemployment tax break. Take the steps now to ensure that you’re not in trouble come tax time if you’re still receiving unemployment benefits.