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The US $ 1.9 trillion bailout enacted last 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 who earn 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 benefit payments, as an employer could withdraw taxes from your paycheck. Instead, unemployment beneficiaries must request that taxes be withheld from their benefits, and the withholding is limited to 10%.
This led to confusion and anguish 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.
If you received benefits and filed your 2020 income tax returns: Wait
Taxpayers who received unemployment income last year and have already filed their 2020 income tax return should wait before filing an amended return, according to the IRS.
“For those who received unemployment benefits last year and have already filed their 2020 income tax return, the IRS stresses that they should not file an amended return at this time, until the IRS issues additional guidance, ”the tax agency said on March 12.
Many advocates have called on the IRS to proactively issue refunds to taxpayers who have overpaid. These lawyers include Senator Dick Durbin of Illinois and Representative Cindy Axne of Iowa, who along with 19 members of the House and Senate urged the IRS to automatically issue refunds without requiring amended tax returns.
Nina Olson, the former national taxpayer lawyer, told Politico that such an automatic correction on previously filed returns was well within the IRS’s capabilities. 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.
While the tax change is good news, it is also confusing for many.
“People have so many questions about how it works – people who have filed their taxes and want to know, do they need to change their returns,” said Stephanie Freed, founder of ExtendPUA.org, a group founded by last year that pleads for the unemployed. Freed estimated that, since last week, the small group has heard several hundred people ask for advice on their tax returns.
If you haven’t declared your taxes: wait
“Wait and wait” is also the message from the IRS to taxpayers who have yet to file a case.
The IRS said it “will provide a worksheet for paper filers and work with the software industry to update current tax software” to make it easier for people to report unemployment benefits. Tax professionals say 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.
Will states also waive taxes?
Some states are expected to amend their tax laws to follow federal guidelines. States like Alabama, California, Montana, New Jersey, Pennsylvania, and Virginia already exempt unemployment benefits from tax. Other states that generally impose unemployment may decide not to do so this year.
ExtendPUA.org is pushing for all states to follow the lead of the federal government and exempt unemployment benefits from tax, Freed said.
“I’m New Yorker and I always have a big tax bill from state and local taxes,” she said. “A lot of states follow federal guidelines, so they’ll include this pardon, but there are about 12 that don’t. New York is one of them and it has some of the highest taxes in the country. . “
An “adjustable wrench” during tax season
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 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.”
Medows is also delaying filing its clients’ returns until the IRS clarifies its rules.
“My clients are impatient because they want refunds and stimulus payments, but I’m waiting,” Medows said. “I have to file amended returns and I’m personally slowing things down now. I don’t finalize things until we are guided.
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.
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