More than one million workers have filed for unemployment benefits each week for the past year, and there are more than eighteen million workers currently on unemployment benefits. These workers won’t be able to return to work until the vaccine rollout is complete and the economy revs back up to a place where millions can be rehired. The American Rescue Plan (ARP) Act, which is heading to President Biden this week, recognizes the critical role of unemployment benefits in stabilizing families, preventing poverty and propping up consumer spending in the economy until then. Critically, this package is set to be enacted before benefits will begin to expire on March 14 for 11.4 million workers. This commentary includes questions and answers about how the new law continues critical pandemic benefits and addresses large surprise tax bills for jobless workers.
Unemployment Benefit Programs
The American Rescue Plan continues the aggressive program of assistance for those unemployed due to the COVID-19 pandemic that started by the CARES Act in March last year. This new act includes action to extend the three most important pandemic programs: Pandemic Emergency Unemployment Compensation (PEUC), Pandemic Unemployment Assistance (PUA) and Federal Pandemic Unemployment Compensation (FPUC)/Mixed Earners Unemployment Compensation (MEUC).
How many weeks of pandemic benefits can I receive?
The American Rescue Plan extends the main programs for those who lost work during the pandemic through Labor Day (September 6, 2021) in the following ways:
- PEUC and PUA benefits will be paid through the week ending September 6, 2021, and cut off after that point with no grace period.
- The maximum duration of PEUC benefits have been increased from 24 to 53 weeks. PEUC benefits are paid to those who were initially eligible for state benefits but exhausted them before finding a job.
- The maximum duration of PUA benefits were increased from 50 to 79 weeks. Those in high unemployment states could receive up to 86 weeks of benefits. PUA benefits are paid to those who are ineligible for state benefits, including the self-employed, but can demonstrate they lost their job for a specific COVID-related reason
How much will I receive on top of normal benefits?
While President Biden and the House of Representatives proposed increasing the additional FPUC benefits from $300 to $400 per week, the Senate reduced that amount down to its current level of $300 per week, enacted in the Continued Assistance for Unemployed Workers (CAUW) Act in December. Any individual receiving federal or state unemployment benefits, including through special programs like Trade Adjustment and work-sharing, receives the $300 per week supplement. FPUC is available through September 6. These additional benefits are especially critical for states like Mississippi, Alabama, Louisiana, and Arizona, which have some of the lowest benefits and highest proportion of Black and Hispanic workers on UI.
MEUC, a new program established in December in the CAUW Act ,will continue to pay an additional $100 per week (through September 6) to any worker receiving state unemployment benefits for W-2 work who also had more than $5,000 in self-employment income in the year prior to being laid off. This makes up for lower state benefits, as compared to PUA, for these mixed earners.
Will I get these benefits if my benefit year is expiring?
Many jobless workers who lost a job at the beginning of the pandemic have seen a notice that their benefit year is expiring, and that they need to reapply. Understandably, this has added to the anxiety of the March 14 benefit cliff.
The “benefit year” refers to the one-year period that individuals can collect state benefits, and then reapply for assistance. If a worker has worked intermittently since being laid off initially, they could be eligible for benefits again and establish a new benefit year. Benefits under this new calculation are typically lower than the original amount. Furthermore, these new benefits generally supersede federal extended benefits, which has caused major concerns among policymakers and advocates during the development of the December stimulus (CAUW Act) and the American Rescue Plan.
Those required to reapply for benefits at the end of the benefit year should not be worried about a major reduction in aid. This includes those who did not work at all in 2020 once the pandemic started, and would not qualify for new benefits. A special rule in the CAUW Act, extended by the American Rescue Plan, allows individuals on PEUC to defer their state benefits and continue on PEUC at their existing weekly benefit rate through September 6. This option must be provided to anyone whose PEUC benefits are $25 higher than what they would have received on regular UI through this subsequent benefit year. States have several options for implementing this rule and may require those on state benefits to submit a new initial application for state benefits, and unemployed workers should watch for any notifications that they need to take action. In the most common option, individuals would be able to stay on PEUC and simply defer regular benefits to when the PEUC program ends. The special rule does not apply to those on PUA or EB however, and these individuals would need to stay on benefits but at the lower state amount.
Understanding the Tax Changes
Many unemployed workers had been bracing for a major surprise tax bill resulting from UI benefits, including the $600 FPUC payment from April to July, but the American Rescue Plan has offered significant relief from this potential tax bill.
The American Rescue Plan exempts the first $10,200 of unemployment insurance benefits from federal income taxes, as long as those benefits were received in 2020 and as long as your household adjusted gross income is less than $150,000 (adjusted gross income is, generally, your income before most deductions). The exemption applies to all the benefits tied to unemployment insurance, whether earned under a traditional state program or the extra 2020 benefits. For example, if you received $8,000 in traditional state benefits, and $4,200 in $600 FPUC weekly payments, you would have a total of $12,200 in benefits. You would exclude the first $10,200, and pay tax only on the remaining $2,000. This also applies to benefits received from Extended Benefits (EB), PUA, and PEUC.
I’ve already filed my taxes. What now?
As we’re writing this, the IRS is still figuring out what to do about people who have already filed their 2020 tax return. If your return has already been processed by the IRS—for example, if you’ve already received a refund check—it is possible that you will have to file an amended return in order to claim the $10,200 exemption. Amending your return basically means that you re-file your return, but subtract up to $10,200 of UI benefits. Depending on your tax rate, that could result in a refund check of more than $1,000.
Amended returns can be e-filed, and some commercial tax preparation software can help you prepare and file the amended return (known as the 1040-X). Most will charge you a fee for e-filing the form, however. Remember that you can always use the software to print your return and mail it in instead.
If you can afford to wait, it’s probably best not to file your amended return right away, and to see if the IRS will announce special procedures for processing amended returns with UI income. Check in with your tax preparer, if you have one, for more details.
If you filed a return and haven’t heard anything back from the IRS, and you have unemployment insurance benefit income reported, you should expect some delay in processing your return. If you were expecting a refund, know that the refund may be delayed as a result; but the good news is the refund will likely be larger than what you originally claimed.
I haven’t filed my taxes yet. Should I wait?
Probably. Talk to your tax preparer, if you have one. It is likely that the IRS will establish a procedure for handling returns with income from UI. If you are able to follow that procedure, it will probably speed the processing of your return. So waiting to hear what the IRS announces could actually mean that you get your refund faster. We’ll try to update this FAQ when we know more.
Do I have to file in order to claim my stimulus check?
No, but you might want to. The American Rescue Plan includes direct relief checks for most households, but the amount of the check depends on the size of your household and your income. If your income is below the applicable cutoff ($75,000 for individuals, $112,500 for heads of household and $150,000 for couples filing jointly), you will receive the full check amount ($1,400 per adult and eligible dependent). The check gets a lot smaller as your income above the threshold gets larger; for example, individuals with income above $80,000 will not receive a check.
The IRS will take information from your most recent tax return to determine the size of your check. If your income or household status changed between 2019 and 2020, or if you have a new dependent in the household, you may want to file promptly, even if you also have UI income. Consult your tax preparer for more details.
I think I’ve already paid taxes on all my UI benefits. What do I do?
States are required to offer you the option to withhold taxes on your UI benefits as you earn them, just like your employer withholds taxes from your paycheck. Some states were not able to fully implement withholding, especially for new 2020 benefits, such as the extra $600 weekly payments and PUA. If you chose the withholding option, you can double-check how much was actually withheld by looking at Box 4 of the Form 1099-G the state sent you in late January or early February.
If you have in fact already paid tax on all your UI benefits, you may now be entitled to a refund. Complete your tax return, being sure to include all the information from your 1099-G. Your tax preparer can help you to figure out whether you have overpaid. The UI benefits exemption could increase the amount of your refund.
What if my benefits were delayed and I received UI benefits for weeks in 2020 after December 31, 2020?
If you were paid benefits for a week in 2020, but didn’t receive the payment until 2021, you won’t settle up taxes on those benefits until next year, and this exemption won’t apply.
Does this exemption apply to benefits I’m receiving now? Should I stop withholding?
This exemption only applies to UI benefits received in 2020, and does not affect benefits paid out after December 31, 2020. Withholding can help to avoid a large tax bill next tax season. Given that many workers had issues setting up withholding on benefit payments last year, or were unaware that the option was available, you may want to inquire about your withholding options currently in place for your benefits.
What about my state taxes? Do I still owe state tax on my UI benefits?
It depends where you live. In some states, such as California, UI benefits are not taxed at all. Many other states follow federal law, so that you will be able to exclude the first $10,200 of UI benefits on your state tax return, as well. In about a dozen states, though, we are not aware of any special rules for UI benefits, and you may have to include your UI income on your state return. Those states are the following: Georgia, Hawaii, Indiana, Iowa, Kentucky, Maine, Mississippi, North Carolina, Oregon, Vermont, and West Virginia. Wisconsin also allows some low-income households to exclude a part of their UI benefits. In Ohio, the situation is complex and depends on the outcome of pending legislation, which may result in Ohio’s adoption of the $10,200 exemption. Because of changes New York made in April of 2020, New York law will not include the $10,200 exemption, unless the New York legislature changes course and reverses its earlier decision.
Once the law is signed by President Biden, states should issue guidance to workers about any changes resulting from the law for state income taxes.
Does the legislation affect my “income” for other government programs?
Yes. Many other programs define income using a tax concept known as “adjusted gross income” (AGI). The American Rescue Plan excludes $10,200 in UI benefits from adjusted gross income, if household adjusted gross income is less than $150,000. When you calculate your income for purposes of determining your eligibility for premium support tax credits under the Affordable Care Act, for the Children’s Health Insurance Program (CHIP), or for Medicaid, you can exclude up to $10,200 of UI benefits.
You also can exclude the benefits when you calculate your eligibility for a Pell educational grant. The Free Application for Federal Student Aid (FAFSA) for the 2021–2022 academic year will use your 2019 income. The UI benefits exemption will affect the income you report on the FAFSA for the 2022–2023 academic year (and may change your eligibility for a Pell grant).
Once you file your taxes, your tax form will give you your adjusted gross income to use when applying for these programs. It’s possible that, as a result of this exemption, you may be eligible for programs for which you were previously ineligible. After filing your taxes, if you think you may qualify for new assistance, you may want to re-apply with this new income information.
Several other tax benefits also depend on AGI, and you are now more likely to be eligible for them if you can exclude some or all of your UI benefits from income. These include the American Opportunity Credit, the Lifetime Learning Credit, and deductions for making contributions to a retirement plan. Other safety-net programs, such as SNAP, TANF, WIC, Head Start, and most federal housing assistance (such as Section 8 project-based and voucher programs), do not use adjusted gross income. Your income for purposes of these programs will likely still include unemployment benefits you earned in 2020.
The Earned Income Tax Credit is more complicated. Your EITC increases with “earnings,” but then this benefit is reduced for households with higher “adjusted gross income.” Unemployment benefits do not count as earnings, and so do not increase your EITC rebate, and the American Rescue Act does not change that. However, the exemption may have the effect of increasing the amount of your EITC benefit, because it allows you to exclude $10,200 of UI benefits from your adjusted gross income.
Other safety-net programs, such as SNAP, TANF, WIC, Head Start, school lunch programs, and most federal housing assistance (such as Section 8 project-based and voucher programs), do not use adjusted gross income. Your income for purposes of these programs will likely still include unemployment benefits you earned in 2020.
What about student loans and financial aid?
If you are in an “income-driven repayment” plan, such as REPAY or REPAY-E, your monthly loan payments are computed based on the income you report on your tax return. The $10,200 exclusion for UI benefits can therefore reduce your loan payments for this year.
TheFAFSA for the 2021–2022 academic year will use your 2019 income. The UI benefits exemption will affect the income you report on the FAFSA for the 2022-–2023 academic year (and may change your eligibility for a Pell grant).
Will the federal government continue to support EB benefits?
Federal State Extended Benefits will continue to be 100 percent federally funded through September 6. The CAUW Act provisions that stipulate that individuals who are on EB must finish their 13–20 weeks of eligibility before receiving PEUC remains in place, so you may not immediately switch to PEUC when the bill is enacted.
What help will the ARP give to states struggling to get out from under the heavy load of unemployment benefits?
The American Rescue Plan continues full federal funding of work-sharing benefits for partially unemployed workers. Similarly, states can receive federal funding for the first week of UI benefits if they do not impose a waiting week, or 75 percent funding for charges against nonprofit employers. States will continue to be allowed to borrow, interest-free, from the federal government through September 6 to pay state benefits.
How is the American Rescue Plan dealing with payment delays and program integrity concerns?
The bill gives the U.S. Department of Labor $8 billion to assist with the oversight of all unemployment programs and an additional $2 billion of funding to help states with fraud prevention, equitable access, and timely payment to eligible workers. These resources can be used for new national- and state-based technology solutions to help solve these problems.
Towards a Future with Proactive Recession Policy
The American Rescue Plan continues the important aid started by the CARES Act while undoing the negative tax implications that could have resulted from previous aid. Nevertheless, the back to back benefits cliffs on December 26 and March 14 caused needless stress for jobless workers. In the long term, Congress should put in place automatic stabilizers that guarantee longer and more robust benefits during recession and recovery.