The information in this article was last updated on Aug. 8, 2021. This article relates to the tax laws enacted during the COVID-19 pandemic. These laws may have expired or reverted to their original state. For the most recent updates on unemployment benefits, see Unemployment Compensation from the IRS.
Unemployment benefits have been changing ever since the CARES Act was signed into law in March 2020. To keep you up-to-date on the changes, we’re breaking down how unemployment benefits have evolved throughout the pandemic and what those changes mean for your clients:
The CARES Act
The CARES Act was signed into law in March 2020. It dramatically expanded unemployment benefits, primarily through three main programs: the FPUC, PUA, and PEUC.
- The Federal Pandemic Unemployment Compensation (FPUC) paid an additional $600/week on top of states’ usual unemployment benefits for weeks between April 5, 2020 and July 31, 2020.
- The Pandemic Unemployment Assistance program (PUA) allows independent contractors, part-time workers, and other workers who would not normally qualify for unemployment insurance to receive unemployment benefits.
- The Pandemic Emergency Unemployment Compensations program (PEUC) offered an additional 13 weeks of unemployment benefits after individuals had exhausted their normal benefits.
- The CARES Act also required states to waive or be flexible with the requirement that applicants must be “actively seeking work” if their ability to search for work was impacted by COVID-19.
The Consolidated Appropriations Act, or the “second stimulus”
In December 2020, Congress passed a second round of pandemic-related relief known as the Consolidated Appropriations Act , also frequently referred to simply as the “second stimulus bill.” This bill extended many provisions of the CARES Act which were set to expire at the end of the year.
- This act reenacted the Federal Pandemic Unemployment Compensation (FPUC), which had expired at the end of July, but at a lower payment of $300/week.
- PUA and PEUC were both extended to April 5.
The American Rescue Plan
The American Rescue Plan was signed into law in March 2021. Like the Consolidated Appropriations Act, it extended many of the expanded unemployment benefits of the CARES Act.
- Extends the additional payment of $300/week through September 6, 2021
- Extends PUA and PEUC until September 6, 2021 (It extends an individual’s eligibility to collect PUA benefits from 50 to 79 weeks and to collect PEUC from 24 to 53 weeks.)
- Offers a tax break on some unemployment benefits received in 2020.
Tax refunds on unemployment benefits
Under the American Rescue Plan, the first $10,200 of unemployment benefits received in 2020 is not taxable if annual income was less than $150,000. This meant that many of your clients who received unemployment benefits in 2020 may have been eligible for a refund from the IRS.
While many states are offering the same tax break on state income taxes, at least thirteen states are not, namely Colorado, Georgia, Hawaii, Idaho, Kentucky, Massachusetts, Minnesota, Mississippi, North Carolina, New York, Rhode Island, South Carolina and West Virginia. Clients in these states could still receive the tax break for their federal taxes, however.
What tax preparers need to know right now
Expanded unemployment benefits will end early in some states
While the expanded unemployment benefits are currently set to expire on September 6, at least 24 states will end them early in June or July. The White House and other states will return to stricter requirements to qualify for unemployment benefits, including the requirement to actively seek work.
The IRS is issuing refunds on unemployment benefits
The IRS is in the process of issuing refunds to taxpayers who overpaid on their unemployment benefits. In most cases, taxpayers do not need to file an amended return to get their refund even if they filed their taxes before the American Rescue Plan was signed into law. See our updated post on how your clients’ unemployment income will be taxed for more details.
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