Unemployment benefits aren't getting taxed - but people may not know that

• Unemployment benefits up to $10,200 won't be taxed, per a provision in the new stimulus package.
• That might be news for many Americans, some of whom were hit by surprise tax bills.
• The CEO of H&R Block told Insider that the IRS hasn't decided on how they'll execute the change.

Over the weekend, I went for a long-needed haircut. I had received my first shot of the Pfizer-BioNTech shot about two weeks earlier, and knew that I had some vaccine protection; I was eager to finally get a professional cut.

When I got there, we began chatting about life and work. I started to talk about my coverage of the recent stimulus package, and some of the things that I wish more people knew about, like the historic investment in Native programs. One little known provision I was also fond of: Unemployment benefits up to $10,200 would no longer be taxed for those making up to $150,000.

With that proclamation, my hairstylist spun around my chair and had me address the whole store; this was news to several of the customers and workers, who had been dreading paying out taxes on unemployment benefits they received, or hadn't realized unemployment benefits were taxed regardless.

It's emblematic of the impact that that one provision tucked away in the $1.9 trillion stimulus relief package could have for the millions of Americans who received unemployment - and how it's been a learning experience for many.

Some Americans didn't know unemployment was taxable, or didn't have the option to deduct taxes when filing unemployment. As The Washington Post reported, some Americans who had received unemployment also received surprisingly hefty tax bills in the hundreds or thousands.

Jeff Jones, the CEO of H&R Block, told Insider that the tax company has been focusing on teaching people about the tax questions surrounding UI benefits.

"No question, unemployment is new for tens of millions of people. We see people making mistakes, and this is why we love the change to under $10,000, because we saw people already this year, we knew it was coming," Jones said. "We did proactive education. People didn't know that it was taxable."

Around 40 million Americans received unemployment insurance benefits in 2020, according to a report from The Century Foundation (TCF). The total outlay of that came to over $580 billion. Per that report, less than 40% of UI payments in 2020 had taxes withheld, with some states not giving recipients the option to withhold.

The tax break on unemployment was part of a last minute deal

Insider's Joseph Zeballos-Roig previously reported that the forgiveness for benefits came as part of a last minute deal on unemployment by Senate Democrats. That new provision also included $300 in federal unemployment benefits through September 6.

But there may still be some potential confusion for impacted taxpayer: Jones said that the IRS hasn't actually made any decisions on yet how "we'll actually execute" that change to unemployment or the Child Tax Credit.

"People need help. It's what we do and we'll stand behind them," he said.

According to the TCF report, low-wage workers and workers of colors were likely to have gotten higher levels of UI income, "due to their over-representation in the hardest hit sectors, stubborn levels of unemployment, and lengthy jobless spells."

But Jones said that he believes the IRS is one of the most unappreciated civil services there are in the country, and has dealt with well-documented historical underfunding. Even in a "normal" year, he said, their system is taxed - and now the IRS is also contending with a new round of stimulus checks and the unemployment forgiveness.

"I'm confident they're doing everything they can to make the most of what they have."

Do you have a story to share about being on unemployment and navigating tax season? You can contact this reporter at jkaplan@insider.com.