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Susan Tompor
| USA TODAY
Taxes for 2020: Do you owe taxes on stimulus checks or unemployment?
Because of the coronavirus pandemic, 2020 can be a fiscal year like no other. Here are the answers to some of your main questions.
USA TODAY
The latest $ 1.9 trillion stimulus package creates a new tax cut for tens of millions of workers who received unemployment insurance last year after companies were forced to close and dismiss them during the coronavirus pandemic .
Many Americans who were potentially left with a surprise tax bill on this unemployment benefit are about to benefit from the new exemption. Until now, unemployment insurance had to be declared as taxable income and many probably owed federal taxes on those benefits.
“It’s retroactive. This is for 2020,” according to Kathy Pickering, tax director at H&R Block. “This is great news.”
Approximately 40 million Americans received unemployment benefits in 2020, according to The Century Foundation, a center for left-wing studies.
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This totaled $ 580 billion in total benefits across the country that were considered taxable income. These benefits include the $ 600 extra bonus that expired in July and the $ 300 extra weekly benefit through the Lost Salary Assistance program that ended in the fall.
Less than 40% of unemployment benefits payments in 2020 had taxes withheld, estimates The Century Foundation.
Here’s what you need to know:
How does the $ 10,200 tax exemption work?
As part of the American Rescue Plan, many taxpayers would not be required to pay taxes on up to $ 10,200 in unemployment benefits received last year. The exclusion is up to $ 10,200 of unemployment benefits for each spouse for couples.
Therefore, it is possible that, if both lose their jobs in 2020, a couple filing a joint statement does not need to pay federal income tax of up to $ 20,400 in unemployment benefits.
It can be a little confusing. So, for example, if one spouse received $ 15,000 in unemployment benefits, but the other received only $ 1,000 in unemployment insurance in 2020, the tax-free exclusion the couple would receive would be $ 11,200 – not $ 16,000.
Who is eligible?
Not all will be covered.
The special tax exemption provision on some unemployment earnings applies to those who earned less than $ 150,000 in adjusted gross earnings in 2020.
Pickering gave this example of potential savings. Consider a single archiver who worked part of 2020 but was unemployed for a short time last year.
Suppose a single contributor had an adjusted gross income of $ 75,000 in 2020. And let’s assume that the only unemployment benefits they received totaled $ 10,200 when they were unemployed.
That taxpayer could now exclude the $ 10,200 in unemployment benefits.
Pickering said the single filer would be in the 22% range, so the filer would save about $ 2,244 in taxes, thanks to the new exclusion of some unemployment benefits.
What about state taxes?
More than half of the states levy income tax on unemployment benefits. States will have to decide whether to also offer tax incentives on the state income tax.
It is possible that some still choose to tax unemployment benefits, experts say.
Some already exempt taxes on unemployment, including California, New Jersey, Virginia, Montana and Pennsylvania. And some do not charge state income taxes at all, including Texas, Florida, Alaska, Nevada, Washington, Wyoming and South Dakota.
Should I wait to file my taxes to claim compensation?
Many unemployed Americans rushed to complete their taxes to get a possible refund to help pay the bills. The tax exemption is becoming law after 55.7 million tax returns have already been filed by the Americans with the IRS on March 5.
Some filers may consider waiting to file their taxes until the IRS issues a new guideline to claim the new $ 10,200 exemption, experts say.
To be sure, the stimulus package also offers $ 1,400 stimulus checks for individuals who have earned up to $ 75,000 and couples with incomes up to $ 150,000. Payments would decrease for rents above these limits, gradually leaving above $ 80,000 for individuals and $ 160,000 for couples.
Some taxpayers may choose to file their taxes earlier to receive the latest stimulus check, especially if their 2020 income was less than in 2019.
What if I have already declared my taxes?
Obviously, some people have already declared their taxes and now they may need to see what other measures they would have to take. We will probably hear more guidance from the IRS on this in the coming days.
It may be necessary to submit a corrected statement.
If you withheld taxes on unemployment benefits, federal taxes are withheld at a rate of 10%. About $ 10,200 in unemployment benefits, we’re talking about $ 1,020 in federal taxes that would have been withheld. It is the money that could go to cover the income tax you owe – or possibly lead to a larger federal income tax refund.
Many people have not withheld taxes from their unemployment checks, so they are still looking to pay any taxes they may owe on unemployment insurance that exceed the new $ 10,200 exemption for singles and for each spouse in a joint declaration of marriage declaration.
Those who faced prolonged unemployment in 2020, however, could have received far more benefits and could still owe some taxes on their unemployment benefits. This is only a partial measure of tax relief.
In some cases, if people did not have enough tax deductions on unemployment benefits, they could still face fines and interest.