Will there be unemployment tax refund this season?

Another tax season is here and those who received unemployment benefits in 2021 could be in for a nasty shock.

Last year's tax season saw a federal tax break on unemployment benefits due to the economic crisis caused by the coronavirus pandemic, but that isn't the case this year. Because unemployment benefits are taxable income, beneficiaries who did not have tax withheld in 2021 may owe the IRS money or receive a smaller-than-expected tax refund.

"There's no exclusion this year," said Mark Luscombe, principal analyst for Georgia-based Wolters Kluwer Tax & Accounting. "But last year at this point there was no exclusion either. At this point all unemployment compensation in 2021 is fully taxable and I'm not expecting an exclusion to be adopted."

The tax season began on January 24, and the deadline to submit your taxes is April 18. Tax filers may be wondering if the US government will reward individuals who got unemployment benefits with another tax discount.

According to The Century Foundation, nearly 40 million people received benefits in 2020, with everyone receiving $14,000 on average. According to the group, taxes were withheld from fewer than 40% of payments.

Under the American Rescue Plan Act, tax payers had up to $10,200 in unemployment benefits exempted from federal taxation in 2020.

According to the IRS website, the American Plan Act applies to you if your modified adjusted gross income (AGI) is less than $150,000. The American Rescue Plan, which took effect on March 11, 2021, exempts up to $10,200 in unemployment compensation paid in 2020 from income, meaning you won't have to pay tax on it. If you're married, each spouse who receives unemployment compensation of up to $10,200 is exempt from paying taxes on it. Amounts over $10,200 per person are still taxed. You can't claim unemployment benefits if your modified AGI is $150,000 or above. You cannot deduct any unemployment compensation for your spouse if you file Form 1040-NR. Your unemployment benefit should be recorded separately from your exclusion.

Since early 2021, the US economy and employment market have improved dramatically. Unemployment claims had dropped to pre-pandemic levels by the end of December. The unemployment rate in the United States is at 3.9 percent, the lowest level since February 2020.

That isn't to claim the labor market is back to full strength. Nearly 2.3 million people have departed the labor force, putting employment 3.6 million jobs below its pre-pandemic level.