The latest updates to the $ 1.9 trillion federal coronavirus aid package could save millions of people from a surprise tax bill.
The Senate on Saturday approved a version of Covid’s aid package that is slightly different from the one passed by the House. Senate Democrats agreed to reduce additional unemployment benefits from $ 400 to $ 300 a week, but extended payments until the end of September.
They also included a clause to exempt taxes on the first $ 10,200 in unemployment income for those who earned less than $ 150,000 in 2020.
Making the first $ 10,200 of unemployment insurance income non-taxable aims to prevent families from being hit by a surprise tax bill at a difficult time for many. In 2020, about 40 million Americans received unemployment insurance benefits, according to a February research article by Brian Galle and Elizabeth Pancotti for The Century Foundation.
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“Partial tax forgiveness will ensure that millions of Americans do not have to send their exemption checks back to the IRS and can instead put food on the table, replenish receipts and pay rent,” said Pancotti, who is director Employer America’s policy framework.
These benefits – including the $ 600 weekly pandemic federal unemployment compensation premium and the $ 300 weekly extra through the Lost Wages Assistance program – are considered taxable income. Unemployed people may choose to have 10% of benefits retained to cover federal tax obligations, but less than 40% of beneficiaries appear to have done so in 2020, according to the newspaper.
In addition, some states did not offer workers who received unemployment benefits through the CARES Law programs the option of withholding a portion of their income for tax purposes.
Who the account will help
On average, the provision in the last stimulus project will reduce up to $ 1,020 in tax liabilities, increasing people’s reimbursement or reducing the amount they owe, according to Pancotti. That could mean even more for people in the higher tax brackets, she said.
Of course, those who had more than $ 10,200 in unemployment income in 2020 will still be taxed on the rest of the benefits. This can result in tax collection for some, depending on how much total income they had in 2020.
For example, if someone had about $ 20,000 in unemployment benefits in 2020, and that was their only source of income during the year, the first $ 10,200 would be exempt from taxation, according to Richard Auxier, senior policy associate of the Urban-Brookings Tax Policy Centro.
The remaining $ 9,800 would be taxable, but the person would also be subject to the standard $ 12,000 deduction and should probably not pay any taxes, he said.
But, if someone had the same amount of unemployment income, but also worked part of the year, he could end up paying some tax on his benefits, depending on the rest of his situation.
“All other parts of the tax system come into play,” said Auxier, adding that eligibility for other credits, such as income tax credit or child tax credit, can change how much you owe.
What to know about taxes if you become unemployed
To be sure, there is still some time before Covid’s stimulus project becomes law. The House plans to vote on the legislation again on Tuesday and then send it to President Joe Biden to sign it.
Even when this happens, however, it will take some time for the IRS and the Ministry of Finance, as well as tax preparers and companies, to implement and advise on the new rules.
This means that if you had unemployment income in 2020, it is best to wait to submit your income tax return to the IRS, even if it is already in the middle of the filing season. It also means that if you have already applied for 2020, you will need to submit a corrected statement, but you must also wait to do so until the bill becomes law.
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