Tax Questions Answered: Do I have to Pay Taxes on the Stimulus or Unemployment Benefits?

by Christopher Youngblood

As the tax deadline quickly approaches, many wonder if the $3200 of stimulus money and unemployment will affect their taxes. After extensive research, here is what we know so far. 

Do I Have to Pay Taxes for “Free” Money? 

Since March 2020, three rounds of economic relief (commonly known as stimulus check) were sent out to help families stay afloat in a struggling economy.

The first was part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The payments include $1200 per individual and $2400 for couples. The second, known as the Consolidated Appropriations Act, came at the end of 2020 with a $600 check per person and $1200 for married couples. Each care package also provided funds for every child in your household. 

The most recent was the American Rescue Plan which gave individuals earning less than $75,000 a check for $1400. $2800 for married couples with income under $150,000.

The question is if any of this money will be tax by the government. 

The short answer is no. The stimulus payments are not considered taxable income. It’s seen more as a tax credit that you don’t have to pay back. 

The IRS has a longer answer to this question: 

No, the payment is not income, and taxpayers will not owe tax on it. The payment will not reduce a taxpayer’s refund or increase the amount they owe when they file their 2020 tax return next year. A payment also will not affect income for purposes of determining eligibility for federal government assistance or benefit programs.

What about Unemployment Benefits? 

The answer to whether Americans will have to pay taxes on unemployment benefits during a pandemic is generally “yes.”  

According to the IRS, any form of unemployment compensation is taxable and must be included in your 2020 tax filing. (This includes the $600 per week from the CARES Act and the $300 per week from the American Rescue Plan.) Unemployment recipients will receive a Form 1099-G that shows the total amount of compensation in box one and how much was withheld in box 4. (Although, you can choose not to have your benefits withheld on a federal level.)

To prevent unemployed taxpayers from going into tax debt (or possibly avoid filing altogether), a tax break was included to waive up to $10,200 in federal income tax on unemployment benefits. The tax break will only apply to 2020. 

State Taxes

State-level income tax depends on which state(s) you resided in during 2020 and 2021. Some states tax unemployment in full while others don’t. Kiplinger’s article “Taxes on Unemployment Benefits: A State-by-State Guide” discusses how each state handles unemployment regarding taxes, including states waiving unemployment tax for 2020 and 2021. Here are a few examples:

  • Colorado: Taxes unemployment benefits in full. 
  • Flordia: Does not tax unemployment benefits; does not have a state income tax.
  • Maryland: Normally taxes unemployment but will waive in 2020 and 2021 for residents making less than $75,000 ($100,000 or less for married couples).

File Your Taxes By May 15th

If you are not ready to file your taxes before April 15th, then you are in luck. The IRS announced on March 17th that they will extend the deadline to May 17th (quarterly payments are still due on April 15th). Be sure to do your due diligence, as penalties may even occur after the new deadline. 

Related Reads:

What to Do With Your Stimulus

A Field Guide to Navigate Taxes

How to Hire an Accountant

I am just a simple writer who wants to travel the world, eat at every restaurant in the world, and gain financial freedom before the age of 40 (45 at the latest). I specialize in content writing and social media marketing with the goal of working in the sports and entertainment industry. My interests include Film/TV, anime, sports, finances, and of course: food. 

To learn more about me, Follow me on LinkedInInstagram, and Twitter.   


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