The ginormous rescue plan that is about to become law includes retroactive waiver of unemployment tax on first $10,200 of unemployment benefits. I see no reason reason why unemployment should be taxable at all. However I’m afeared this is going to be a gigantic dumpster fire to implement.
It’s retroactive and includes all of 2020. Some had unemployment tax (usually 10%) withheld from their unemployment benefits. And have already filed their 2020 tax returns. Others did not have tax taken out and paid it when they filed.
You can see the problem. In both cases the filed tax returns will now be incorrect. Either they paid $1,020 in advance on that $10,200 or they paid the tax when they filed. In either case, the money needs to be refunded. And reported income on their tax return needs to be changed.
Lowering reported income, especially for low / middle income families, could in turn increase their child and earned income credits, making refunds larger.
Also, employers pay into unemployment funds, and if taxpayers get that waiver, then maybe it changes what employers are required to pay.
This is a good idea, however right now no one has a clue how this will be done.