The latest updates to the $ 1.9 trillion federal coronavirus relief package could save millions of people from a surprise tax bill.
On Saturday, the Senate approved a version of the Covid aid package that is slightly different from the one approved by the House. Senate Democrats agreed to reduce the additional unemployment benefit to $ 300 a week from $ 400, but extended payments until the end of September.
They also included a provision to waive taxes on the first $ 10,200 of unemployment income for those who earned less than $ 150,000 by 2020.
Making the first $ 10,200 of unemployment insurance income unaffordable aims to prevent families from suffering a surprise tax bill at a difficult time for many. By 2020, approximately 40 million Americans were receiving unemployment insurance benefits, according to a February research paper written by Brian Galle and Elizabeth Pancotti for The Century Foundation.
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“Partial tax forgiveness will ensure that millions of Americans don’t have to return their relief checks to the IRS by mail and instead can put food on the table, refill prescriptions, and pay rent,” he said. Pancotti, who is director of policy at Empra America.
These benefits, including the additional $ 600 weekly pandemic unemployment compensation and the additional $ 300 weekly through the lost wages assistance program, are considered taxable income. Unemployed people may choose to withhold 10% of benefits to cover federal tax liability, but it appears that less than 40% of recipients have done so by 2020, according to the newspaper.
In addition, some states did not offer workers receiving unemployment benefits through the CARES Act programs the option to withhold a portion of tax revenue.
Who will be helped by the bill
On average, the provision of the latest stimulus bill will reduce up to $ 1,020 in tax obligations, either by increasing people’s repayments or by reducing the amount they owe, according to Pancotti. This could become even bigger for people with higher tax brackets, he said.
Of course, those with more than $ 10,200 in unemployment income by 2020 will continue to be taxed for the rest of the benefits. This could result in a tax bill for some, depending on how much total revenue they had in total in 2020.
For example, if someone had about $ 20,000 in unemployment benefits by 2020 and that was their only source of income for the year, the first $ 10,200 would be tax-free, according to Richard Auxier, a senior partner in tax policy. of Urban-Brookings Center.
The remaining $ 9,800 would be taxable, but the person would also be subject to the standard $ 12,000 deduction and would probably not owe any taxes, he said.
But if someone had the same amount of unemployment income but also worked part of the year, they could end up paying some tax on their benefits, depending on the rest of their situation.
“All other parts of the tax system are up and running,” Auxier said, adding that eligibility for other credits such as income tax credit earned or child tax credit could change what should be.
What you need to know about taxes if you are unemployed
Of course, there is still some time before the Covid stimulus bill becomes law. The House plans to re-vote the legislation on Tuesday and then send it to President Joe Biden to sign.
Even once that happens, it will take some time for the IRS and the Treasury Department, as well as tax preparers and businesses, to implement and guide the new rules.
This means that if you had unemployment income in 2020, it’s best to wait to file your tax return with the IRS, even though it’s already halfway through the filing season. It also means that if you have already filed in 2020, you will need to submit an amended statement, but you should also wait to do so until the law is legal.
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