Beware of Income Taxes on Unemployment Benefits for Tax Year 2021

October 15, 2021
Beware of Income Taxes on Unemployment Benefits for Tax Year 2021

Income Taxes on Unemployment Benefits for the tax year 2021 as of to date will not have the same tax break than in 2020.  In 2020, the United States saw record numbers of Americans go jobless due to the COVID-19 Pandemic.  Millions of Americans received unemployment benefits in 2020.  On March 11, 2021, the American Rescue Plan legislation was passed to provide an additional round of relief to those affected by the pandemic.  Contained in that legislation was a federal tax exemption for the first $10,200 of unemployment benefits received by a taxpayer, provided that modified adjusted gross income for the year was under $150,000.  In our area, both Kansas and Missouri adopted the federal exemption, so the first $10,200 of unemployment benefits received in 2020 were exempt from state taxes in both Kansas and Missouri.

Unfortunately, the American Rescue Plan was not passed into law until after millions of tax returns had already been filed.  The IRS has begun to issue refunds to those taxpayers who filed their tax returns before the tax exemption went into effect, but you may want to file an amended tax return for 2020 if you didn’t claim the exemption and paid taxes on the first $10,200 of unemployment benefits received in 2020, and you still haven’t received a refund from either the IRS or the Kansas or Missouri Departments of Revenue.

Difference between the Tax break for 2020 and the Tax break for 2021

The tax break for 2020 saved a lot of people from owing money when they filed their 2020 tax returns.  But, what about 2021?  There were still a tremendous number of people receiving unemployment benefits in 2021, so is there a similar tax break for unemployment benefits received in 2021?  As of this writing in October 2021, the answer is “No”.  Experts do not believe that there will be one coming either, due to the economic recovery in 2021 being stronger than anticipated.  That means that a lot of people are going to get a nasty surprise when they file their 2021 federal and state income tax returns.

If you did receive unemployment benefits in 2021, what type of taxes can you expect to owe on them?

Most experts recommend that anyone receiving unemployment benefits in 2021 should either have 10% in federal withholding from their unemployment checks or set aside 10% in savings to pay the federal taxes.  In Kansas, the tax rate is 3.1% on income received between $2,500 and $15,000, rising to a maximum of 5.7% state taxes on income above $30,000 (double those figures for a couple).  In Missouri, the state income tax rate starts at 1.5% on income between $108 and $1,088 and rises to a maximum of 5.4% on all income over $8,704.

So, let’s say you were on unemployment for the first 3 months during 2021, then got a job for the remainder of the year.  Assuming you averaged $600 per week in unemployment benefits, you would have received $7,800 in unemployment (13 weeks x $600).  Then, if you got a job making $20 per hour, you would have earned approximately $31,200 during the remaining 9 months of 2021 (1,560 hours at $20 per hour).  Assuming you were single, that means that your unemployment income will likely be taxed at 5.7% in Kansas and 5.4% in Missouri, plus a roughly 10% federal income tax (estimated and simplified for the purposes of this example).  So, in Kansas, you’ll pay about $1,225 on your unemployment income and in Missouri, about $1,200.  That’s a nasty little surprise, especially for someone who is dealing with other financial problems.

If you find yourself dealing with tax debt or any other type of debt that has overwhelmed you, just know that a Chapter 13 bankruptcy can wipe out ordinary unsecured debt (such as credit cards and medical bills), while allowing you to pay off back taxes over up to a 5 year period with no additional penalties or interest accruing.  And although Chapter 7 won’t affect any recent tax debt, it may enable you to wipe out some of your debts, allowing you to pay off your federal and state income tax debts directly to the government.  For more information, visit our website at www.kansascitybankruptcy.com or contact us for a free, no obligation consultation with one of our attorneys to determine if bankruptcy can be helpful for you.  At WM Law, we are Here to Help.

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