As Americans file their tax returns for 2020 (a year full of job insecurity), millions of people who relied on unemployment insurance during the pandemic will find that up to $ 10,200 of those benefits they will be tax-free.
The tax cut is part of the American Rescue Plan, President Joe Biden’s $ 1.9 trillion relief package that also includes direct payments to Americans in 2021.
The unemployment waiver is the result of a compromise between Democrats and Republicans to get the package approved. They agreed to cut weekly employment benefits from $ 400 to $ 300, but also to continue the federal increase through Sept. 6 and make the first $ 10,200 income tax free for unemployed Americans who earn less than $ 150,000.
Brian Galle, a professor at Georgetown Law School, analyzed the impact of The Century Foundation, a progressive think tank, that examined the nearly $ 580 billion in unemployment benefits sent to more than $ 40 million. Americans in 2020.
The Century Foundation study estimates that the average U.S. unemployed received $ 14,000 in unemployment benefits during 2020, so the tax exemption could drastically reduce the amount many families owe.
Galle points out that people on lower incomes benefit especially.
“And if you have a big tax bill to forgive, it’s because you were out of work for a long time,” Galle said. “And so the bigger the benefit you get from this tax cut, the harder your period in 2020 will be.”
Galle points out that many Americans who don’t know they are taxing their unemployment benefits may not be prepared for the government’s “surprise bill”.
All Americans who receive unemployment insurance will receive a Form 1099-G detailing how much the individual or household received in benefits in fiscal year 2020.
The IRS recommends using this form to complete Form 1040, the standard tax worksheet. On lines 7 and 8 of the form, include the amount of unemployment insurance you received with your spouse and add these numbers. The total number is the amount of “unemployment benefit excluded from your income.”
Should those Americans who have already filed unknowing taxes on the $ 10,200 exemption file a modified return?
“Absolutely not,” Internal Revenue Service chief Charles Rettig said Thursday in statements to Capitol Hill.
“We believe we are sensitive to the situation people are in. We believe we will be able to handle it all on our own. We believe we will be able to automatically issue refunds associated with the $ 10,200,” Rettig told lawmakers.
It may mean that Americans who took the tax cut will have to wait for any refund they are entitled to, as the IRS is working to process a huge backlog. Retting told Congress he expects the “summer” delay to be processed.
Galle points out that most states will comply with federal tax law, but says there are about 12 states that can levy taxes on unemployment benefits, even with federal exemptions.
Although many of the provisions of the American Rescue Plan have been criticized, tax cuts are less contested, for example, than direct payments.
“It’s not like sending checks to all Americans: this provision is aimed at at least people who have lost their jobs,” said Adam Michel, a senior political analyst with the Heritage Foundation, a conservative think tank.
Some Republicans, such as Sen. Rob Portman in R-Ohio, criticized the move for adding it to the U.S. rescue plan, and some opponents said it would encourage Americans to stop working.
“The economy is improving and everyone says it when they look at what’s going on [unemployment insurance], if it’s too high, it’s a disincentive to work, “Portman said.” You want to have a system that is balanced where you encourage people to work, there are so many places in our states that work right now for employers. ”
Senator Ron Wyden, D-Ore, a staunch supporter of the measure during negotiations in early March, disagreed, arguing that the income exemption protects families who fought during the pandemic.
“For example, if you’ve been fired from your job through no fault of your own and you’re having trouble getting to the end, you don’t have a thousand dollars to pay a surprise tax bill and the part that claims to be tax relief for working families offer you absolutely nothing, ”Wyden said.
The provision only applies to fiscal year 2020, although experts like Galle think it makes sense for it to become permanent.
“This should be permanent because it never made sense to tax unemployment insurance benefits,” Galle said. “We don’t tax SNAP … we don’t tax school canteen programs, and the reason is because the point of the program is to transfer money to people at a time when they really need it, and it just doesn’t make sense to hand over money to people. people with one hand and take them away with the other. “
Trish Turner and Allison Pecorin of ABC News contributed to this report.