More Americans eligible for $10,200 unemployment tax break under new IRS rule

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More Americans are eligible to take advantage of a tax break on unemployment benefits under new guidance issued this week by the IRS.

The $1.9 trillion coronavirus stimulus plan that President Biden signed last week, known as the American Rescue Plan, waives federal income taxes on up to $10,200 in 2020 unemployment insurance benefits for individuals who earn less than $150,000 a year, potentially saving out-of-work Americans thousands of dollars from a surprise tax hit.

Although the IRS initially signaled that taxpayers had to count unemployment benefits as part of their 2020 income, the agency said Tuesday that workers can exclude the aid when calculating their modified adjusted gross income — meaning more individuals will meet the necessary income threshold to take advantage of the policy.

WHEN WILL THE EXTRA $300 IN UNEMPLOYMENT BENEFITS BEGIN?

For instance, an individual who earned $140,000 last year but collected $10,200 in jobless aid would have been disqualified from the tax break under the initial interpretation of the law. But that individual no longer has to pay taxes on the first $10,200 they received in unemployment aid under the newest guidance.

In this Dec. 18, 2020, file photo, a person passes the office of the California Employment Development Department in Sacramento, Calif. (AP Photo/Rich Pedroncelli, File) (AP)

The break applies to this tax-filing season, which began Feb. 12 and ends May 17.

It's still unclear whether states that count unemployment benefits as taxable income will waive the levy this year, too, and adhere to federal guidelines. Alabama, California, Montana, New Jersey, Pennsylvania and Virginia are the only ones to completely exempt it.

HERE'S HOW THE $10,200 UNEMPLOYMENT TAX BREAK IN BIDEN'S COVID RELIEF PLAN WORKS

The federal government and most states count unemployment benefits, including the extra money distributed through federal aid programs, as taxable income. But unlike a typical paycheck, taxes aren't automatically deducted from jobless aid, creating a potential for refund shock for millions of out-of-work Americans even though they lost their job.

You do not have to pay Social Security and Medicare taxes on your unemployment benefits.

Goldman Sachs economists estimated in a recent analyst note that individuals could owe as much as $50 billion in unanticipated federal and state taxes, potentially forcing consumers to reduce spending and hurting the broader economy. The new law, which passed without a single Republican voting for it, will save Americans an estimated $25 billion, according to The Wall Street Journal.

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A recent survey conducted by Jackson Hewitt found that 38% of Americans receiving benefits were unaware that the money was taxable – and nearly two-thirds of those individuals had not set aside or withheld money from the payment for their 2020 income taxes.

About 40 million people collected jobless aid last year, according to The Century Foundation. The average person received $14,000 in benefits.

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