The $ 1.9 billion US rescue plan signed last week includes a welcome tax break for unemployed workers. The law waives federal income taxes up to $ 10,200 in unemployment insurance benefits for people earning less than $ 150,000 a year, which can save workers thousands of dollars. States that are currently taxing unemployment benefits have yet to decide whether they can waive this state tax as well.
The change, according to the Wall Street Journal, is good news for many taxpayers, who could save as much as $ 25 billion. But it is also affecting an already complicated tax season for a tax collection agency that is already lagging behind thanks to understaffing and pandemic fueled disruptions.
Wait, unemployment is taxable?
In most years, yes. The federal government considers unemployment benefits to be a taxable income, although taxes are not automatically deducted from the payment of benefits, the way an employer can deduct taxes from your salary. Instead, unemployment recipients should request that taxes be withheld from their benefits, and the withholding tax be limited to 10%.
This led to confusion and anxiety for the unprecedented number of workers who received unemployment benefits for a portion of 2020 and filed their taxes for the year, just to lower their typical repayment – or to say in some cases that they owe money.
Bridget Harwood, a Michigan resident, was fired from her medical assistant position for three months last year when many businesses in her city closed. The unemployment benefits she received during that time also resulted in a smaller tax refund this year. Instead of the refund of about $ 1,500 she normally receives, she only got $ 72 back.
“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 forced her into unemployment. Harwood filled out her daughter’s tax return and found that she owed $ 1,000 in federal and state taxes. When Harwood explained the situation to her daughter, who was expecting a refund for a new car, she “started crying”, Harwood said.
If you received benefits and submitted your 2020 tax: Wait
Taxpayers who received unemployment income last year and have already filed their 2020 tax returns will have to wait before filing an amended return, the IRS says.
“For those who received unemployment benefits last year and have already filed their tax return for 2020, the IRS stresses that they do not currently have to file an amended return until the IRS provides additional guidance,” the tax agency said on March 12. .
Many advocates have asked the IRS to proactively issue refunds to taxpayers who have paid too much. Advocates include Senator Dick Durbin of Illinois and Representative Cindy Axne of Iowa, who along with 19 members of the House and Senate encouraged the IRS to issue refunds automatically without requiring amended tax returns.
Nina Olson, the former national taxpayer’s lawyer, told Politico that such an automatic correction on already filed returns was well within the capabilities of the IRS. The alternative – digging through a mountain of modified returns – “really creates more processing burdens for the IRS,” which began this season with a backlog of last year, Olson said.
While the tax change is welcome news, for many it is also confusing.
“People are asking so many questions about how it works – people who have filed their taxes and want to know, need to change their returns,” said Stephanie Freed, founder of ExtendPUA.org, a group founded last year and campaigning for people who do not work. Freed estimated that the small group has heard from hundreds of people since last week who have given guidance on their tax returns.
If you did not file your tax return: Wait
“Hold on and wait” is also the IRS’s message to taxpayers who have yet to serve.
The IRS said it would “provide a worksheet for paper files and work with the software industry to update current tax software” to make it easier for people to report unemployment benefits. Tax benefits say it will take at least a few days, if not longer, before tax software reflects recent legislative changes.
“I have two stacks of returns that I can’t file right now,” said Rob Seltzer, a CPA in Los Angeles. “I have one client who received $ 15,000 in unemployment. If I submitted her return, it would not work,” he said.
Will states also waive taxes?
Some countries are expected to change their tax laws to follow federal guidance. States like Alabama, California, Montana, New Jersey, Pennsylvania and Virginia are already exempt from unemployment benefits. Other states that can usually decide not to do it this year are tax unemployed.
ExtendPUA.org urges all states to follow the federal government’s guidance and exempt unemployment benefits from taxes, Freed said.
“I’m a New Yorker and still have a substantial state and local tax bill,” she said. “Many states follow federal leadership so they will include that forgiveness, but there are about 12 who do not. New York is one of them and it has some of the highest taxes in the country.”
A “monkey wrench” in tax season
Under the changes in the new law, anyone who has been unemployed for an entire 2020 or the entire year can save thousands in taxes. Someone who has received $ 10,200 or more in unemployment benefits, and is in the 10% tax rate, can save $ 1,200 in federal income tax, assuming their adjusted gross income for the year was less than $ 150,000. (Taxpayers in higher tax brackets will save more.)
However, the fact that the tax law was changed a month after the IRS adopted tax promises to further complicate an already challenging filing season.
The law “will place a monkey wrench in the 2020 filing,” said Jonathan Medows, a CPA in Manhattan. “It’s a cascade – the IRS is backed up, software companies are backed up, practitioners are backed up.”
Medows also keeps submitting its clients’ returns until the IRS clarifies its rules.
“My clients are impatient because they want refunds and stimulus payments, but I’m waiting,” Medows said. “I have to submit amended returns and personally I’m delaying things now. I’m not finalizing things until we get guidance.”
More time to submit?
All of these changes lead to a call on the IRS to extend its 2020 tax filing deadline. The National Conference of CPA Practitioners has called on the agency to postpone the deadline and delay the collection of fines until it works through the stack. Democrats in Congress, including House Ways and Means chairman Richard Neal and Bill Pascrell, chairman of the oversight subcommittee, also called for the tax filing deadline to be extended.
The IRS has so far stuck to the April 15 deadline for most Americans, although about 10% of taxpayers living in Texas already have a two month extension.