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The US $ 1.9 trillion bailout enacted this week includes a welcome tax break for the unemployed. Law waives federal income tax of up to $ 10,200 in unemployment insurance benefits for people earning less than $ 150,000 a year, potentially saving workers thousands of dollars . States that currently impose unemployment benefits have yet to decide whether they will allow the waiver of these state taxes as well.
The change is good news for many taxpayers, who could save up to $ 25 billion, according to the Wall Street Journal. But it also affects an already complex tax season for a collection agency that is already behind schedule thanks to understaffing and fueled by a pandemic disturbances.
Wait, is unemployment taxable?
In most years, yes. The federal government views unemployment benefits as taxable income, although taxes are not automatically withheld from the benefit payment, as an employer could withdraw taxes from your paycheck. Instead, unemployment beneficiaries must request that taxes be withheld on their benefit form, and the withholding is limited to 10%.
This led to confusion and angst for the unprecedented number of workers who received unemployment benefits during part of 2020 and who filed their taxes for the year only to see their typical refund reduced – or in some cases to be told they owe money.
Michigan resident Bridget Harwood was fired from her job as a medical assistant for three months last year when many businesses in her town closed. The unemployment benefits she received during that time also resulted in a lower tax refund this year. Instead of the roughly $ 1,500 reimbursement she typically receives, she only recovered $ 72.
“It was really a shock,” Harwood said.
It was even worse for Harwood’s eldest daughter, who worked at a fast food restaurant before the pandemic pushed her out of work. Harwood completed her daughter’s tax return and found that she owed $ 1,000 in state and federal taxes. When Harwood explained the situation to his daughter – who was expecting a refund to buy a new car – she “started to cry,” Harwood said.
An “adjustable wrench” in the 2020 taxes
Under the changes to the new law, a person who was unemployed for part or all of 2020 could potentially save thousands in taxes. A person who received $ 10,200 or more in unemployment benefits and who is in the 10% tax bracket could save $ 1,200 in federal income tax, assuming their adjusted gross income for the year was less than $ 150,000. (Taxpayers in higher tax brackets would save more.)
However, the fact that the tax law was changed a month after the IRS began accepting taxes promises to further complicate an already difficult filing season.
The IRS has yet to issue guidance on how taxpayers who may have been told they owe money under the old tax law can get back any money they may have paid. too much under the new law. CBS MoneyWatch asked for clarification on what these taxpayers should do.
Tax experts say these people are likely to have to file an amended return. But they – and people who haven’t yet – are advising individuals to wait to give the IRS time to issue advice, and for tax software to catch up with the new law.
The law “is going to put a wrench in 2020 filings,” said Jonathan Medows, a Manhattan-based CPA. “It’s a waterfall – the IRS is backed up, the software companies are backed up, the practitioners are backed up.”
What to do if you haven’t declared your taxes: Wait
Taxpayers who received Paycheck Protection Program loans or unemployment benefits last year are better off waiting to file a return for two reasons, tax experts say. First, it will take at least a few days, if not longer, for tax software to reflect recent changes in the law.
“I have two stacks of returns that I can’t file right now,” said Rob Seltzer, a Los Angeles-based CPA. “I have a client who lost $ 15,000 in unemployment. If I produced his statement, it wouldn’t work, ”he said.
Second, some states may change their tax laws to follow federal guidelines. States like Alabama, California, Montana, New Jersey, Pennsylvania, and Virginia already exempt unemployment benefits from tax. States other than fiscal unemployment might decide not to do so this year.
Many taxpayers have so far delayed filing their tax returns. About 12 million fewer tax returns were filed in early March this year than in 2020, according to IRS figures.
If you have already deposited, you may need to change
Taxpayers who have already filed their taxes will likely need to file an amended return. However, many advocates have called on the IRS to take action and reimburse taxpayers who have overpaid.
One of those advocates is Nina Olson, the former national taxpayer lawyer, who asked the IRS to amend taxpayer returns, telling Politico it was within the jurisdiction of the tax agency to automatically correct declarations already filed. The alternative – digging through a mountain of amended returns – “really creates more processing load for the IRS,” which started this season with a backlog from last year, Olson said.
More time to deposit?
All of these changes prompt the IRS to extend its 2020 tax filing deadline this year. The National Conference of CPA Practitioners has called on the agency to delay the deadline and delay collecting penalties until. that she works through her stacking. Democrats in Congress, including House Ways and Means Speaker Richard Neal and Oversight Subcommittee Chairman Bill Pascrell have also called for an extension of the tax filing deadline.
The IRS has so far met the April 15 filing deadline for most Americans, although about 10% of taxpayers living in Texas have already received a two month extension.
As for Bridget Harwood, she is delaying filing her children’s income tax returns until the IRS issues clearer guidelines, but has already sent hers. “If I have to change it, then I can go back and change it,” she said.
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