US $ 1.9 trillion rescue plan signed into law this week includes a welcome tax cut for unemployed workers. The law waives federal income taxes with up to $ 10,200 in unemployment insurance benefits for people earning less than $ 150,000 a year, potentially saving workers thousands of dollars. States currently taxing unemployment benefits have not yet decided whether to allow these state taxes to be waived.
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 is already behind due to understaffing and fueled by the pandemic disturbances.
Wait, is unemployment taxable?
In most years, yes. The federal government considers unemployment benefits to be taxable income, although taxes are not automatically deducted from benefit payments, how an employer could deduct taxes from your salary. Instead, unemployment recipients must claim withholding taxes from the benefit form, and the withholding is limited to 10%.
This led to confusion and anxiety for the unprecedented number of workers who have been out of work for part of 2020 and filed their taxes for that year, only to find the typical refund of the reimbursement – or, in some cases, to be told that he owes money.
Michigan resident Bridget Harwood was sent to work as a nurse for three months last year when many companies in her city closed. The unemployment benefits he received at the time also led to a lower tax refund this year. Instead of the approximately $ 1,500 refund he usually receives, he only received $ 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 pushed her into unemployment. Harwood filed his daughter’s tax return and found that he owed $ 1,000 in federal and state taxes. When Harwood explained the situation to his daughter – who had been waiting for a refund for a new car – he “started crying,” Harwood said.
A “monkey key” in the 2020 taxes
According to the amendments to the new law, a person who has been unemployed for part or for the whole of 2020 could save thousands of taxes. Someone who received $ 10,200 or more in unemployment benefits and falls into the 10% tax category could save $ 1,200 on federal income taxes, assuming their adjusted gross income for that year was lower. of $ 150,000. (Taxpayers in parentheses would save more.)
However, the fact that the tax law was changed a month after the IRS began accepting taxes promises to further complicate an already difficult filing season.
The IRS has not yet issued guidance on how taxpayers who may have been told they owe money under the old tax law can recover any money they overpayed under the new law. CBS MoneyWatch has asked for clarification on what those taxpayers should do.
Tax professionals say those people are likely to have to file an amended return. But they – as well as people who haven’t filed yet – advise individuals to wait until the IRS has time to issue guidance and get tax software up to date with the new law.
The law “will put a monkey key in the 2020 files,” said Jonathan Medows, a Manhattan-based CPA. “It’s a cascade – the IRS is supported, software companies are supported, practitioners are supported.”
What to do if you haven’t filed your taxes: Wait
Taxpayers who received loans or unemployment benefits under the Wage Protection Program last year are best expected to file for two reasons, tax experts say. First, it will take at least a few days, if not longer, for the tax software to reflect recent changes in the law.
“I have two stacks of returns that I can’t file now,” said Rob Seltzer, a Los Angeles-based CPA. “I have a client who received $ 15,000 in unemployment. If I submitted his statement, it would not work,” he said.
Second, some states may change their tax laws to follow federal guidelines. States, including 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.
Many taxpayers have so far stopped filing taxes. About 12 million fewer tax returns were filed in early March this year than in 2020, according to IRS figures.
If you have already submitted, you may need to change
Taxpayers who have already filed their taxes will likely need to file an amended return. However, many attorneys have called on the IRS to take action and reimburse overpaid taxpayers.
One such lawyer is Nina Olson, a former national taxpayer lawyer, who has asked the IRS to amend taxpayers’ returns, telling Politico that it is the responsibility of the tax agency to automatically correct already filed returns. The alternative – dug through a mountain of altered yields – “really creates more of a processing burden for the IRS,” which began this season with a surplus from last year, Olson said.
Do you still have time to deposit?
All of these changes are incentives for the IRS to extend its tax filing deadline to 2020 this year. The national conference of CPA practitioners called on the agency to postpone the deadline and stop collecting penalties until it works by accumulation. Democrats in Congress, including House Ways and Means chairman Richard Neal and oversight subcommittee chairman Bill Pascrell, have also called for an extension of the tax filing deadline.
The IRS has so far kept the April 15 filing deadline for most Americans, although about 10% of taxpayers living in Texas have already received a extension of two months.
As for Bridget Harwood, she stops filing tax returns on her children until the IRS issues clearer guidelines, but has already sent hers. “If I have to change it, then I can go back and change it,” she said.