He $ 1.9 trillion from the rescue plan signed into law this 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 the benefit form, 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.
A “monkey key” in the 2020 taxes
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 taxes, assuming their adjusted gross income for the year was less than $ 150,000. (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 IRS has not yet issued guidelines on how taxpayers who can be told they owe money under the old tax law can recover money they have overpaid under the new law. CBS MoneyWatch has asked for clarification on what those taxpayers should do.
Tax professionals say these people are likely to have to file an amended return. But they, as well as people who have not yet filed, advise people to wait to give the IRS time to issue guidelines and for tax software to catch up with the new law.
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.”
What to do if you haven’t filed taxes – wait
Taxpayers who received loans or unemployment benefits from the Payroll Protection Program last year are better off waiting to apply for two reasons, tax experts say. First, it will take at least a few days, if not more, for the tax software to reflect recent changes in 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.
Second, some states may change their tax law to follow federal guidelines. States included in Alabama, California, Montana, New Jersey, Pennsylvania and Virginia are already exempt from unemployment benefits. Other states that tax unemployment may decide not to do so this year.
To date, many taxpayers have been reluctant to file their taxes. In early March this year, about 12 million fewer tax returns were filed than in 2020, according to IRS data.
If you have already submitted it, you may need to modify it
Taxpayers who have already filed their taxes will likely need to file a modified return. However, many advocates have asked the IRS to act and issue refunds to overpaid taxpayers.
One such advocate is Nina Olson, the former national taxpayer advocate, who has asked the IRS to amend taxpayer returns, telling Politico that it was up to the tax agency to automatically correct already filed returns. 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.
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’s National Conference of Professionals has called on the agency to delay the deadline and refrain from charging penalties 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.
As for Bridget Harwood, she stops filing her children’s tax returns until the IRS issues clearer guidelines, but she has already submitted her. “If I have to modify it, I can go back and modify it,” he said.