Unemployment benefits were set to be taxed. Senate Democrats may have just fixed that.

Unemployment insurance weekly benefits stimulus checks recession job losses coronavirus pandemic
Carlos Ponce joins a protest in in Miami Springs, Florida, asking senators to continue unemployment benefits past July 31, 2020. Joe Raedle/Getty Images
  • The stimulus passed by the Senate includes a waiver on some taxes on unemployment benefits.
  • The first $US10,200 ($13,241) in unemployment benefits wouldn’t be taxed for those making up to $US150,000 ($194,720).
  • It could save some workers from hefty bills on the benefits they received while out of work.
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There’s a notable tax exemption tucked into the version of the stimulus package the Senate passed over the weekend: it has to do with unemployment benefits.

Specifically, people making up to $US150,000 ($194,720) wouldn’t be taxed on the first $US10,200 ($13,241) in unemployment benefits they received. That could make a real difference for many.

Around 40 million Americans received unemployment insurance benefits in 2020, with the total outlay coming to more than $US580 ($753) billion, according to a report from The Century Foundation (TCF). Less than 40% of UI payments in 2020 had taxes withheld, per the report – and some states didn’t even offer those who received benefits through the CARES Act the option to withhold.

As The Washington Post reported, that meant that some Americans ended up with surprise tax bills in the hundreds or thousands.

Now, the first $US10,200 ($13,241) in benefits will be exempted. Those who received more than that amount will still be taxed on benefits beyond $US10,200 ($13,241), but as Richard Auxier, senior policy associate in the Urban-Brookings Tax Policy Center, told CNBC, the standard deduction of $US12,000 ($15,578) would still be applicable to those who received over that amount.

“Due to their over-representation in the hardest hit sectors, stubborn levels of unemployment, and lengthy jobless spells, low-wage workers and workers of color are likely to have received high levels of unemployment insurance income,” the TCF report said.

The measure came as part of a last-minute deal that Senate Democrats brokered on unemployment, as Insider’s Joseph Zeballos-Roig reported. That plan also includes an additional $US300 ($389) in unemployment benefits through September 6.

Some eligible for the waiver have already filed their 2020 taxes. Generally, as Insider’s Tanza Loudenback reports, it’s possible to file an amended return within three years if income, deductions, or filing status changes – and the IRS will likely have specific instructions for those affected if the measures passes.