The latest updates to the $ 1.9 trillion federal coronavirus aid package could save millions from a surprise 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 of Representatives. Senate Democrats agreed to cut supplemental unemployment aid to $ 300 a week from $ 400, but extended the payments through the end of September.
They also include a provision to waive taxes on the first $ 10,200 in unemployment income for those who earned less than $ 150,000 in 2020.
Untaxing the first $ 10,200 in unemployment insurance income is meant to prevent families from being hit by a surprise tax bill at a difficult time for many. By 2020, about 40 million Americans will receive unemployment insurance, according to a February research paper written by Brian Galle and Elizabeth Pancotti for The Century Foundation.
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“Partial tax forgiveness will ensure that millions of Americans will not have to return their checks to the IRS, but instead will be able to put food on the table, replenish prescriptions and pay the rent,” said Pancotti, policy director at Use. America.
Those benefits – including the additional $ 600 weekly in federal pandemic unemployment compensation and the additional $ 300 weekly through the Lost Wages Assistance program – are considered taxable income. People who are unemployed can choose to withhold 10% of benefits to cover federal tax liability, but less than 40% of recipients appear to have done so by 2020, according to the paper.
In addition, some states did not offer employees who received unemployment benefits through CARES Act programs the option to withhold a portion of income for tax purposes.
Who will help the bill
According to Pancotti, the provision in the latest stimulus bill will cut an average of $ 1,020 in tax liabilities, either increase people’s refunds or decrease the amount they owe. This could add up even more for people in higher tax brackets, she said.
Of course, those who had more than $ 10,200 in unemployment income in 2020 will still be taxed on the rest of the benefits. This could result in a tax bill for some, depending on the total income they had in total in 2020.
For example, if someone had about $ 20,000 in unemployment benefits in 2020, and that was their only source of income for the year, the first $ 10,200 would be tax exempt, said Richard Auxier, senior policy officer at the Urban-Brookings Tax Policy Center.
The remaining $ 9,800 would be taxable, but the person would also be subject to the standard $ 12,000 deduction and probably wouldn’t owe any tax, he said.
But if someone had the same amount of unemployment income but also worked part of the year, they might have to pay some tax on their benefits, depending on the rest of their situation.
“All other parts of the tax system are going into effect,” Auxier said, adding that being eligible for other credits, such as the income tax credit or the tax credit for children, could change how much someone would have to pay.
What to Know About Taxes When You Are Unemployed
Certainly, there is still some time before the Covid incentive law becomes law. The House plans to vote again on the legislation on Tuesday and then send it to President Joe Biden for signature.
But even once that happens, it will take some time for the IRS and the Treasury Department, as well as tax preparers and corporations to implement and guide the new rules.
This means that if you had unemployment income in 2020, it’s best to wait to file your tax return with the IRS, even if it’s already in the middle of filing season. It also means that if you have already submitted an application for 2020, you must submit an amended tax return, but also wait for the bill to become law.
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