THE US $ 1.9 trillion US bailout plan signed last week includes a welcome tax cut for unemployed workers. The 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. The states that currently tax unemployment benefits have yet to decide whether to allow these state taxes to be waived as well.
The move 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 fiscal season for a tax collection agency that is already lagging powered by a pandemic interruptions.
Wait, is unemployment taxable?
Most years, yes. The federal government considers unemployment benefits to be taxable income, although taxes are not automatically deducted from benefit payments, in the same way that an employer can deduct taxes from your wages. Instead, unemployed beneficiaries must request that taxes be withheld from their benefits, and withholding is limited to 10%.
This led to confusion and anguish to the unprecedented number of workers who received unemployment benefits in part of 2020 and completed their taxes for the year only to find that their normal reimbursement has been reduced – or, in some cases, to be told they owe money.
Michigan resident Bridget Harwood was released from her job as a medical assistant for three months last year, when many companies closed in her city. The unemployment benefits she received during that time also resulted in a lower tax refund this year. Instead of the refund of about $ 1,500 that she normally receives, she only received $ 72 back.
“It was definitely a shock,” said Harwood.
It was even worse for Harwood’s eldest daughter, who worked at a fast-food restaurant before the pandemic pushed her into unemployment. Harwood filed his daughter’s tax return and found that she owed $ 1,000 in federal and state taxes. When Harwood explained the situation to his daughter – who was waiting for a refund to buy a new car – she “started to cry,” said Harwood.
If you received benefits and filed your 2020 taxes: wait
Taxpayers who received unemployment income last year and have already filed their 2020 tax returns must wait before filing an amended tax return, says the IRS.
“For those who received unemployment insurance last year and have already completed their 2020 income tax return, the IRS emphasizes that they should not file an amended claim at this time, until the IRS issues additional guidance,” the tax agency said in March 12.
Many advocates have asked the IRS to proactively issue refunds to taxpayers who have overpaid. Among those defenders are Senator Dick Durbin of Illinois and Congresswoman Cindy Axne of Iowa, who along with 19 members of the House and Senate urged the IRS to issue refunds automatically without requiring changed tax returns.
Nina Olson, the former National Taxpayer Attorney, told the Politician that such automatic correction in completed statements was within the capabilities of the IRS. The alternative – combing through a mountain of corrected returns – “really creates more processing burdens for the IRS,” which started this season with an accumulation last year, Olson said.
While changing taxes is good news, it is also confusing for many.
“People are asking so many questions about how it works – people who have declared their taxes and want to know if they have to change their statements,” said Stephanie Freed, founder of ExtendPUA.org, a group founded last year that advocates for unemployed people. . Freed estimated that, since last week, the small group has heard hundreds of people asking for guidance 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 not yet filed the lawsuit.
The IRS said it “will provide a spreadsheet 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 more, for the tax software to reflect recent changes in the law.
“I have two piles of returns that I can’t file right now,” said Rob Seltzer, a Los Angeles-based accountant. “I have a client who received $ 15,000 in unemployment. If I registered her return, it wouldn’t work,” he said.
Will states also waive taxes?
Some states are expected to change their tax laws to follow federal guidelines. States like Alabama, California, Montana, New Jersey, Pennsylvania and Virginia already exempt unemployment benefits from taxes. Other states that usually tax unemployment may decide not to do so this year.
ExtendPUA.org is pushing for all states to follow the example of the federal government and exempt unemployment benefits from taxes, said Freed.
“I’m a New Yorker and I still have a significant state and local tax bill,” she said. “Many states follow federal guidelines to include this pardon, but there are about 12 that do not. New York is one of them and has some of the highest taxes in the country.”
A “wrench” at the time of taxes
According to changes in the new law, a person who became unemployed for part or all of 2020 can save thousands in taxes. Someone who received $ 10,200 or more in unemployment benefits and is in the 10% tax range, could save $ 1,200 in federal taxes, assuming their adjusted gross income for the year was less than $ 150,000. (Taxpayers in higher tax ranges would save more.)
However, the fact that the tax law was changed a month after the IRS started accepting taxes promises to further complicate an already challenging filing season.
The law “will put a spanner in the 2020 lawsuits,” said Jonathan Medows, a Manhattan-based accountant. “It is a waterfall – the IRS is supported, the software companies are supported, the practitioners have the support.”
Medows is also postponing filing its customers’ returns until the IRS clarifies its rules.
“My clients are impatient because they want to receive refunds and stimulus payments, but I am waiting,” said Medows. “I have to present the corrected returns and I am personally slowing things down now. I am not finalizing things until we get guidance.”
More time to file?
All of these changes are spurring calls for the IRS to extend its tax filing deadline to 2020 this year. The National Conference of CPA Practitioners called on the agency to delay the deadline and postpone the collection of penalties until it resolves its pileup. Democrats in Congress, including President of the Chamber of Modes and Resources, Richard Neal, and President of the Subcommittee on Oversight, Bill Pascrell, 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.