The $ 1.9 trillion US bailout plan Signed into law this week includes a welcome tax break for unemployed workers. The law abolishes federal income taxes of up to $ 10,200 in unemployment insurance benefits for people who earn less than $ 150,000 per year, potentially saving employees thousands of dollars. States that currently tax unemployment benefits have yet to decide whether to also allow those state taxes to be waived.
The change is good news for many taxpayers, who could save as much as $ 25 billion, according to the Wall Street Journal. But it also impacts an already complex tax season for a debt collection agency that is already lagging behind due to understaffing and pandemic-fueled malfunctions.
Wait, unemployment is taxable?
In most years, yes. The federal government considers unemployment benefits taxable income, although taxes are not automatically withheld from benefits, as an employer might deduct taxes from your paycheck. Instead, unemployment recipients must request that tax be withheld from their benefits form, and the withholding is limited to 10%.
This led to confusion and fear for the unprecedented number of workers who received unemployment benefits for part of 2020 and their taxes for the year only served to reduce their typical payback – or in some cases be told they owe money.
Michigan resident Bridget Harwood got a three-month leave of absence from her job as a medical assistant last year when many businesses in her town closed down. The unemployment benefit she received at the time also resulted in a smaller tax refund this year. Instead of the roughly $ 1,500 refund she normally receives, she only got $ 72 back.
“It was definitely a shock,” said Harwood.
It was worse for Harwood’s eldest daughter, who worked in a fast-food restaurant before the pandemic put her out of work. 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 had been expecting a refund for a new car – she “began to cry,” Harwood said.
A “monkey wrench” in 2020 taxes
Under the changes to the new law, a person who was unemployed for part or all of 2020 could potentially save thousands of dollars in taxes. Someone who received $ 10,200 or more in unemployment benefits and is in the 10% tax bracket could save $ 1,200 on federal income taxes, assuming their adjusted gross income for the year was less than $ 150,000. (Taxpayers in higher tax brackets would save more.)
The fact that the tax bill was amended a month after the IRS began accepting tax promises further complicates an already challenging 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 reclaim any money they may have overpaid under the new law. CBS MoneyWatch has asked for clarification on what those taxpayers should be doing.
Tax professionals say those people are likely to have to file an amended tax return. But they – as well as people who haven’t filed yet – are advising individuals to hold off on giving advice to the IRS and for the tax software to catch up with the new law.
The law “is going to place a wrench in the 2020 filings,” said Jonathan Medows, a CPA based in Manhattan. “It’s a cascade – backing the IRS, backing software companies, backing practitioners.”
What to do if you haven’t filed your taxes: Wait
Taxpayers who received a Paycheck Protection Program loan or unemployment benefit last year should hold off filing for two reasons, tax experts say. First, it takes at least a few days, if not longer, for tax software to reflect recent legislative changes.
“I have two piles of tax returns that I am currently unable to file,” said Rob Seltzer, a CPA based in Los Angeles. “I have a client who got $ 15,000 in unemployment. If I reported her, it wouldn’t work,” he said.
Second, some states can change their tax laws to follow federal guidelines. States like Alabama, California, Montana, New Jersey, Pennsylvania and Virginia already exempt unemployment benefits from tax. Others argue that fiscal unemployment could decide not to do so this year.
Many taxpayers have not filed any taxes so far. According to figures from IRS, about 12 million fewer tax returns were filed in early March of this year than in 2020.
If you’ve already applied, you may need to make changes
Taxpayers who have already filed their taxes will likely have to file an amended return. However, many advocates have called on the IRS to take action and reimburse taxpayers who have overpaid.
One such advocate is Nina Olson, the former National Taxpayer Advocate, who has called on the IRS to amend tax returns and told Politico that it was within the powers of the IRS to automatically correct already filed returns. The alternative – by digging a mountain of modified yields – “really creates more processing burden for the IRS,” which started this season lagging behind last year, Olson said.
More time to archive?
All of these changes are an incentive for the IRS to extend the 2020 tax filing deadline this year. The National Conference of CPA Practitioners has called on the agency to postpone the deadline and wait to collect fines until it is through the 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 thus far adhered to the April 15 deadline for most Americans, although about 10% of taxpayers living in Texas already have a two months extension
As for Bridget Harwood, she’s waiting to file her kids ‘tax returns until her kids’ tax returns are clearer, but she’s already sent hers. “If I have to change it, I can go back and change it,” she said.