04 Feb I received unemployment in 2021. Will it be tax-free this time?

Q. I received unemployment in 2021. Do you think the government will make any of it tax-free this time?
— Back to work

A. We’re sorry to hear you were out of work.

We’re also sorry to say we don’t have good news for you.

In 2020, Congress passed the American Rescue Plan Act, which included the exemption from federal taxation of up to $10,200 of unemployment benefits for people whose income — not including the unemployment benefit — was less than $150,000, said Howard Hook, a certified financial planner and certified public accountant with EKS Associates in Princeton.

But unless there are future changes, unemployment compensation received in 2021 is 100% subject to federal income tax, he said.

As far as state taxation goes, each state has different rules regarding the state taxation of unemployment benefits, Hook said. For example, New York for example, taxes recipients who receive unemployment benefits, while New Jersey does not, he said.

“While it is always possible that Congress will change tax laws retroactively like they did with the taxation of unemployment benefits in 2020 – be careful what you wish for,” he said. “Retroactive changes to tax rates or other areas of the tax law that could increase your taxes are possible as well, especially since Congress was unable to pass the Build Back Better tax package at the end of last year.”

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This story was originally published on Feb. 4, 2022.

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