Many Americans face big tax bills on 2021 unemployment benefits

Many Americans who collected unemployment benefits in 2021 may be on the hook for big bills this tax season.

The federal government and most states treat unemployment benefits as taxable income.

However, tax wasn’t collected on about 60% of unemployment benefits paid in 2021, according to Andrew Stettner, an unemployment expert and senior fellow at progressive think tank The Century Foundation who analyzed U.S. Department of the Treasury data.

Here’s another way to think about it: About 60% of people opted not to withhold tax on those benefits, he said.

Approximately 25 million people received unemployment benefits in 2021.

Workers collected $325 billion in total benefits in 2021, Stettner said, citing Treasury data.

States, which administer the benefits, offer the option to withhold tax at a standard 10% rate. State governments reported just $13.3 billion of tax withholding — roughly 40% of the $32.5 billion that would have been collected if everyone opted to withhold tax, Stettner said.

“On average, only 40% of people withheld their taxes, and 60% didn’t withhold at all,” Stettner said.

That’s roughly the same share as in 2020, according to a separate The Century Foundation analysis.

However, there’s a key difference — Congress authorized a federal tax break on up to $10,200 of benefits, per person, in 2020 as part of the American Rescue Plan, a pandemic relief law. Most states gave the break for states levies, too, or already exempt unemployment compensation and other income from tax.

As a result, millions of people didn’t owe tax on their 2020 benefits or owed a lesser amount of tax.

However, a tax break isn’t available for 2021 benefits. That doesn’t mean individuals will necessarily have to write a check to the IRS this tax season — some may get a lower tax refund. Even those who opted for the 10% withholding may owe some money if their annual income lands them in a higher marginal tax bracket.

The deadline to file a 2021 income-tax return is Monday, April 18.