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Will COVID-19 Unemployment Benefits be Taxed this Tax Season?

Written by Elizabeth Fabbri, Juris Doctor Candidate at Quinnipiac University School of Law

Congress increased unemployment benefits in 2020 through the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. If you are a taxpayer who has received COVID-19 unemployment benefits in 2020, you may or may not know that you’ll actually end up paying taxes on those benefits during the upcoming 2020 tax season.

Because of this change, many Americans who usually rely on their yearly tax credit from the Internal Revenue Service (“IRS”) may be surprised to find out they will be receiving a lower tax credit this year, if they even receive a tax credit at all. However, legislation has been recently introduced to the House and Senate, allowing exclusion of coronavirus unemployment compensation from income during 2020.

On March 27, 2020, former President Trump signed the “CARES Act” that expanded qualifications and provided additional benefits for unemployed people. Under the Federal Pandemic Unemployment Compensation (“FPUC”), created in the CARES Act, states could administer an additional $600 per week.

In 2007, America entered into the “The Great Recession.” Former President Barack Obama signed the American Recovery and Reinvestment Act which provided that taxpayers who received unemployment benefits were eligible to exclude the first $2,400 of their unemployment benefits from their income. President Obama pushed this through Congress as fast as possible because he understood America’s immediate need to enact the law.

At the time, unemployment seemed alarmingly high, we hoped to never see those numbers again. Yet, the number of people who suddenly lost their jobs during this pandemic has been staggering compared to the Great Recession. Every economic recession has unquestionably caused hardships, but the consequences of this pandemic have been like no other. Many people are turning to “gig work” and contract positions to cover their bills, but even they are losing work, and losing protection. Parents are having to take care of their children while working from home, or risk traveling to their office, interacting with too many people, and passing the infection to their families. As a result, many parents have had to quit their jobs to take care of their children because schools have been closed. Furthermore, remote learning has been a struggle for many families who do not have access to the internet or other resources.

On February 3, 2021, “The Coronavirus Unemployment Benefits Tax Relief Act” was introduced to the House and Senate. The proposed legislation states, “In the case of any taxable year beginning in 2020, gross income shall not include so much of the unemployment compensation received by an individual as does not exceed $10,200.” Many taxpayers rely and have always relied on the tax credit they usually receive when filing. 2020 was likely the first time many taxpayers were filing for unemployment, and many do not realize they must include unemployment benefits in their gross income. Compared to the 2009 recession, this pandemic far outweighs the Great Recession’s hardships. If there was ever a need to exclude taxes on unemployment, it is now. If this bill were to pass, it would relieve much of the stress and hardship of families who rely on the IRS’s tax credit every year. All eyes will be on the upcoming unemployment legislation to see whether it builds momentum in the upcoming months.

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