Despite federal exemption on unemployment benefits, some jobless might owe taxes to IRS and NY

Local News

(WIVB) — As we have been reporting the IRS is allowing folks on unemployment to keep the first $10,000 without paying taxes. However, the State of New York is not so generous — you have to pay taxes on every dollar of your jobless benefits and more.

When the government passed the American Rescue Plan back in March, Congress approved an exemption on the first $10,200 of unemployment benefits retroactive to January of 2020.

For couples filing jointly, the exemption is $20,400. But the State of New York is forgiving nothing, which can be tough for folks that have already filed their taxes.

Tim Eliason of EG Tax Service says it gets worse. Even for those who had taxes withheld from their unemployment checks, it was not enough.

The federal income tax was under-withheld, but the exemption would erase most of that. However, New York’s withholding on unemployment is 2.5%, while the actual income tax owed would be 4%.

“Even on the federal, for a lot of people, if it had not been for the forgiveness, they were probably going to be behind. Because most people fall in the 12 percent tax bracket. So they were going to fall behind on that, too, but the forgiveness made up for the shortfall,” said Eliason.

But what may seem hard to believe about the federal exemption on unemployment benefits is most unemployment recipients won’t have to file an amended return to get their refunds. The IRS will correct the returns for them on top of all the other unfinished work the tax people still have to do.

“They have not finished 2019 processing of returns for everybody that had paper. They have done two stimulus, they are processing 2020 returns. Now they are doing another stimulus, and yet, too, on their plate is amending everybody’s return that had unemployment,” added Eliason.

IRS officials say they should be issuing the refunds on unemployment checks starting this month.
The first refunds would go to individual tax filers with couples refunds going out in June or July and folks with complex tax returns later in the year.

Al Vaughters is an award-winning investigative reporter who has been part of the News 4 team since 1994. See more of his work here.

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