He $ 1.9 trillion from the rescue plan subscribed to the law last week includes a welcome tax bonus for unemployed workers. The law waives federal income taxes of up to $ 10,200 on unemployment insurance benefits for people earning less than $ 150,000 a year, which can save workers thousands of dollars. States currently taxing unemployment benefits have not yet decided whether to allow these state taxes to be waived as well.
The change 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 tax season for a tax collection agency that has already been left behind due to a lack of staff and fueled by a pandemic interruptions.
Wait, is unemployment taxable?
In most years, yes. The federal government considers unemployment benefits to be taxable income, although taxes are not automatically withheld from benefit payments, the way an employer might deduct taxes from your salary. Instead, unemployment benefits must apply for withholding tax on their benefits and the withholding is limited to 10%.
This led to confusion and anguish for the unprecedented number of workers who received unemployment benefits during part of 2020 and filed their taxes during the year only to find their typical reimbursement reduced, or in some cases to tell them they owe money.
Michigan resident Bridget Harwood was removed from her medical assistant position for three months last year, when many businesses in her city closed. The unemployment benefits he received during this time also meant a smaller tax refund this year. Instead of the approximate $ 1,500 return he normally receives, he only got $ 72.
“It was definitely a shock,” Harwood said.
It was even worse for Harwood’s eldest daughter, who worked at a fast food restaurant before the pandemic brought her unemployed. Harwood filed his daughter’s tax return and found he owed $ 1,000 in federal and state taxes. When Harwood explained the situation to his daughter, who was expecting a refund for a new car, she “started crying,” Harwood said.
If you’ve received benefits and filed 2020 taxes – wait
Taxpayers who received unemployment income last year and who have already filed their tax return by 2020 should wait before filing an amended return, according to the IRS.
“For those who received unemployment benefits last year and have already filed their 2020 tax return, the IRS stresses that they should not file an amended return at this time, until the IRS issues guidelines. additional, “the tax agency said on March 12.
Many advocates have called on the IRS to proactively issue refunds to overpaid taxpayers. Among those advocates are Illinois Sen. Dick Durbin and Iowa Rep. Cindy Axne, who along with 19 members of the House and Senate instat the IRS will issue refunds automatically without the need for modified tax returns.
Nina Olson, the former advocate for national taxpayers, told Politico that this automatic correction of statements already filed was within the capabilities of the IRS. The alternative – digging through a mountain of modified returns – “really creates more processing burden for the IRS,” which began this season with a delay from last year, Olson said.
While the tax change is good news, it is also confusing for many.
“People ask so many questions about how it works: people who have filed their taxes and want to know, have to change their returns,” said Stephanie Freed, founder of ExtendPUA.org, a group founded last year that defends unemployed people. Freed estimates that since last week, the small group has heard several hundred people asking for guidance on their tax returns.
If you have not filed your taxes: Please wait
“Wait and wait” is also the IRS message for taxpayers who have not yet submitted the application.
The IRS said it will “provide a spreadsheet for paper filers and work with the software industry to update current tax software” to make it easier for people to report unemployment benefits. Tax professionals say it will take at least a few days, if not more, for tax software to reflect recent changes to the law.
“I have two stacks of returns that I can’t file right now,” said Rob Seltzer, a Los Angeles-based CPA. “I have a client who got $ 15,000 in unemployment. If he filed his return, it wouldn’t work,” he said.
Will states also waive taxes?
Some states are expected to change their tax laws to follow federal guidelines. States such as Alabama, California, Montana, New Jersey, Pennsylvania and Virginia already exempt taxes from unemployment benefits. Other states that usually tax unemployment may decide not to do so this year.
ExtendPUA.org is pushing for all states to follow the federal government’s example and exempt unemployment benefit taxes, Freed said.
“I’m New Yorker and I still have a significant tax bill on state and local taxes,” he said. “Many states follow federal guidelines, so they will include this pardon, but there are about a dozen that don’t. New York is one of them and has some of the highest taxes in the country.”
A “monkey key” in fiscal season
Under the changes to the new law, a person who was unemployed for all or all of 2020 could save thousands of taxes. Someone who received $ 10,200 or more in unemployment benefits and was in the 10% tax bracket could save $ 1,200 in federal income tax, assuming their adjusted gross income for the year was less than $ 150,000. dollars. (Taxpayers with higher tax brackets would save more.)
However, the fact that the tax law was changed a month after the IRS began accepting taxes promises to further complicate a challenging filing season.
The law “will introduce a wrench to 2020 presentations,” said Jonathan Medows, a Manhattan-based CPA. “It’s a cascade: it’s backed up by the IRS, it’s backed up by software companies, and it’s backed up by professionals.”
Medows is also reluctant to file statements from its clients until the IRS clarifies its rules.
“My clients are impatient because they want refunds and incentive payments, but I’m waiting,” Medows said. “I have to submit amended statements and now I will personally slow things down. I won’t finish things until we get guidance.”
More time to introduce yourself?
All of these changes are a compelling request for the IRS to extend the tax filing deadline to 2020 this year. The CPA National Conference of Professionals has called on the agency to delay the deadline and refrain from charging sanctions until it works through its accumulation. Democrats in Congress, including House Ways and Means chairman Richard Neal and chairman of the oversight subcommittee, Bill Pascrell, have also called for an extension of the deadline to file taxes.
To date, the IRS has remained on the April 15 filing deadline for most Americans, although approximately 10% of taxpayers living in Texas have already received two-month extension.