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Higher Percentage of Americans Must Pay Taxes on 2021 Unemployment Benefits than Did on 2020 Benefits

By:
Ruth Singleton
Published Date:
Apr 4, 2022

GettyImages-1218109894-unemployment-benefits

A higher percentage of Americans will need to pay taxes on the unemployment benefits that they received in 2021 than the Americans who received such benefits in 2020, CNBC reported.  While the percentage of Americans who withheld taxes on their unemployment benefits was similar in both years—about 40 percent—Congress exempted up to $10,200 of benefits from taxation in 2020 in its American Rescue Plan, but there was no similar tax break for 2021 unemployment benefits. (Most states also applied the tax break to state taxes in 2020, but 13, including New York, did not.) 

A February 2021 Century Foundation report explained that the $10,200 figure was equal to the maximum amount of Federal Pandemic Unemployment Compensation (FPUC) that an unemployed worker could have received in 2020.  The foundation found that roughly 40 percent of recipients of unemployment insurance payments in 2020 had taxes withheld on these payments. As a result of the $10,200 exemption, however, millions of people didn’t owe taxes on their 2020 benefits or owed a lesser amount of tax than they would have without the tax break. 

But because no $10,200 tax break is available for taxpayers who received unemployment benefits in 2021, some recipients who opted not to withhold tax may owe money to the federal government or receive a smaller tax refund. And, according to CNBC, even those who opted for the 10 percent withholding may owe some money if their annual income lands them in a higher marginal tax bracket. Approximately 25 million people received unemployment benefits in 2021. Workers collected $325 billion in total benefits, according to Department of Treasury data. 

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