THE US $ 1.9 trillion US bailout plan signed into law this week includes a welcome tax break 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, unemployment beneficiaries must request that taxes be withheld from their benefit forms, 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 her 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.
A “wrench” in 2020 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 IRS has not yet issued guidance on how taxpayers who may have been informed that they owe money under the old tax law can claim any money they have overpaid under the new law. CBS MoneyWatch asked for clarification on what these taxpayers should do.
Tax professionals say these people are likely to need to file a corrected statement. But they – as well as people who haven’t filed the lawsuit yet – advise people to wait to give the IRS time to issue guidelines and for tax software to keep up with the new law.
The law “will put a wrench in the 2020 process,” said Jonathan Medows, a Manhattan-based accountant. “It is a cascade – the IRS is supported, the software companies are supported, the practitioners have the support.”
What to do if you haven’t declared your taxes: wait
Taxpayers who received loans from the Payment Protection Program or unemployment benefits last year should expect to file for two reasons, tax experts say. First, 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.
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 taxes. Others say that fiscal unemployment may decide not to do so this year.
Many taxpayers have so far avoided declaring their taxes. About 12 million fewer tax returns were filed in early March this year than in 2020, according to IRS data.
If you have already placed your order, you may need to change
Taxpayers who have already filed their taxes are likely to need to file an amended statement. However, many advocates have asked the IRS to act and issue refunds to taxpayers who have overpaid.
One of those defenders is Nina Olson, the former National Taxpayer Lawyer, who asked the IRS to change taxpayers’ statements, telling the Politician that it was up to the tax body to automatically correct the statements already submitted. 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.
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 the chairman 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.
As for Bridget Harwood, she is delaying filing her children’s tax returns until the IRS issues clearer guidance, but has already sent hers. “If I have to fix it, I can go back and fix it,” she said.