The latest updates to the $ 1.9 billion federal coronavirus relief package could save millions of people from a surprising tax bill.
The Senate on Saturday passed a version of the Covid aid package that is slightly different from the one passed by the House. Senate Democrats agreed to reduce additional unemployment benefits 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 in unemployment income for those who earned less than $ 150,000 by 2020.
Making the first $ 10,200 unemployment insurance income tax-free is aimed at preventing families from incurring a surprising tax bill on many people. By 2020, about 40 million Americans would have collected unemployment insurance benefits, according to a February research article written by Brian Galle and Elizabeth Pancotti for The Century Foundation.
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“Partial tax forgiveness will ensure that millions of Americans do not have to return their relief checks to the IRS, and instead can put food on the table, refill prescriptions and pay the rent,” Pancotti said. Employ America.
These benefits – including the additional weekly $ 600 of Federal Pandemic Unemployment Benefit and the extra weekly $ 300 through the Lost Loon Assistance program – are considered taxable income. People who become unemployed may prefer to withhold 10% of the benefits to cover federal tax liability, but it appears that less than 40% of recipients did so in 2020.
In addition, some states have not offered workers who receive unemployment benefits through CARES Act programs the option to withhold a portion of the income for tax purposes.
Who will help the account
On average, the provision in the latest stimulus bill will reduce up to $ 1,020 in tax liabilities, increasing people’s repayments or reducing the amount they owe, according to Pancotti. It could cost even more for people in higher tax brackets, she said.
Of course, those who had more than $ 10,200 unemployment income in 2020 will still be taxed on the rest of the benefits. This may result in a tax bill for some, depending on the total income they had in 2020 in total.
For example, if someone had about $ 20,000 in unemployment benefits in 2020 and that was their only income for the year, the first $ 10,200 would be tax-exempt, according to Richard Auxier, senior policy fellow at Urban-Brookings Tax Policy. Centre.
The remaining $ 9,800 would be taxable, but the person would also be subject to the standard deduction of $ 12,000 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 might pay tax on their benefits, depending on the rest of their situation.
“All the other parts of the tax system are starting,” Auxier said, adding that qualifying for other credits such as the income tax credit or child tax credit could change the amount you would owe.
What to know about taxes if you are unemployed
Admittedly, there is still a while before the bill on the stimulus of Covid becomes law. The House plans to vote on the legislation again on Tuesday and then send it to President Joe Biden to sign.
Even if that happens first, the IRS and the Treasury Department, as well as tax preparers and companies, will take a while to implement the new rules and provide guidance.
This means that if you had unemployment income by 2020, it should be best to wait to file your tax return with the IRS, even though it is already the middle of the filing season. It also means that if you have already submitted by 2020, you will need to submit an amended return, but also have to wait to do so until the bill is legal.
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