Will Taxes on COVID-19 Unemployment Benefits Produce Sticker Shock?

The COVID-19 pandemic has certainly been unprecedented in many ways. For millions of Americans who received unemployment compensation during 2020, they may have a rude awaking when filing their 2020 income taxes. Many recipients of unemployment had inadequate withholdings or none at all from their unemployment benefits. It’s noteworthy that some states will also tax unemployment benefits. Many individuals claimed unemployment for the first time during this past year. Taxpayers who received unemployment benefits in 2020 should receive a Form 1099-G from the state in which they received unemployment benefits. Unemployment income received must be reported on each taxpayer’s income tax returns. Any tax liability must be remitted by April 15. Taxpayers who were under-withheld and owe tax may be subject to penalties and interest.   

Congress has introduced legislation to alleviate the tax impact of unemployment benefits. As of this blog posting, legislation has not yet been passed. All eyes look to Congress to see if changes will be made to the federal taxability of unemployment compensation. For those taxpayers who did not have any amounts withheld or under-withheld, consider speaking with your trusted tax advisor as soon as possible.