Millions of Americans will receive a tax break for unemployment benefits this tax season.
However, certain income rules limit who can qualify.
Fortunately, there are some tax maneuvers that affect individual retirement accounts, health savings accounts, and business equipment depreciation that can help workers bypass these restrictions.
“There is a glimmer of hope for you,” said Leon LaBrecque, a financial planner and accountant with Sequoia Financial Group in Akron, Ohio.
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The American Rescue Plan Act, signed by President Joe Biden last Thursday, waived federal taxes on up to $ 10,200 per person in unemployment benefits received in 2020.
This limits the benefit for taxpayers who made less than $ 150,000 in the past year. This upper limit is the same regardless of the login status, e.g. B. single or married.
Income cliff
President Joe Biden signed the American Rescue Plan Act of 2021 for $ 1.9 trillion in the Oval Office on March 11.
Doug Mills-Pool / Getty Images
The boundary acts like a cliff. Taxpayers who made $ 149,999 are eligible, while those who made $ 150,001 – only $ 2 more – would be disqualified.
For Steven Taub, this cliff can prove costly.
The 63-year-old Taub and his wife had a combined gross adjusted income of $ 152,483 last year, according to a TurboTax projection.
Without the American Rescue Plan income rule, the couple who recently moved to Pinehurst, NC from the Seattle area would receive an unemployment benefit tax exemption of $ 20,400 from Washington State – the maximum a couple are allowed to from CNBC audited tax records.
That additional $ 2,483 income could lose you thousands of dollars in tax benefits.
“Unlike many changes where it’s graduated, this is a cutoff,” said Taub. “That really sucks.”
The cliff approach differs from some of the other elements of the $ 1.9 trillion Covid relief measure, Taub noted. For example, the $ 1,400 stimulus check size expires after certain income limits.
Taub and his wife, an accountant who are both now employed again, are working with an accountant waiting to file their taxes.
IRA and HSA contributions
While tax season is on, there are actually some steps people on the threshold of $ 150,000 – like the deaf – can take to cut their 2020 income and apply for the unemployment tax break.
And it seems they have a little more time to do it. The IRS just postponed the tax deadline by a month to May 17th.
Technically, the $ 150,000 income threshold applies to a measure known as “modified gross adjusted income”.
MAGI is a number the government uses to determine eligibility for some other tax break, such as a deduction for student loan interest.
Taxpayers need to do a calculation to determine their MAGI in 2020. (The formula is listed on an unemployment benefit exclusion worksheet published by the IRS.)
Unfortunately, according to accountants, it is difficult to reduce MAGI retrospectively.
“They’re really limited,” said Henry Grzes, the senior manager of tax practice and ethics at the American Institute of Certified Public Accountants.
Retrospective contributions to an HSA or a traditional IRA are two possible avenues. The contributions come with a tax deduction that would reduce the modified adjusted gross income for 2020.
Deduction limits
But there are reservations.
On the one hand, the accounts have annual contribution limits.
In 2020, taxpayers could save up to $ 6,000 in an IRA. (The limit is $ 7,000 for those ages 50 and over.)
Individuals with auto insurance on a high deductible health plan could save up to $ 3,550 on an HSA in 2020. Families could save double that or $ 7,100. Those aged 55 and over will receive an additional $ 1,000.
Overall, a single taxpayer aged 55 and over could use these accounts to reduce their income by a maximum of $ 11,550. For an elderly couple filing a joint return it would be $ 22,100.
And that assumes account holders have not made previous contributions to their IRA or HSA, which is unlikely, said Jeffrey Levine, financial planner and accountant at Buckingham Wealth Partners.
You would also need to have the money on hand to make these contributions.
There’s a specific calculation here too – save more money to get the tax savings.
It might be worth it. A married couple with a combined income of $ 151,000 would likely be in the federal income tax bracket of 22%, Levine said.
In this example, investing just over $ 1,000 in an IRA would result in tax savings of approximately $ 4,500 (assuming a tax break for the maximum of $ 20,400 in unemployment benefits).
Precautions
However, there are other limiting factors.
Contributions to a traditional IRA are fully deductible only if neither a taxpayer nor his or her spouse is saving on a company retirement plan such as a 401 (k).
Taxpayers can only get a partial or no deduction for IRA contributions if they or a spouse is on a company pension plan and their income exceeds a certain limit.
(For example, in 2020 a taxpayer whose spouse saved in a 401[k] will only receive a full IRA deduction if the combined income is less than $ 196,000. However, the income limit is lower – $ 104,000 – if the same taxpayer saved in a 401[k].)
There are also some wrinkles for HSA savers that can limit their deductions. For example, contributions to multiple HSAs may not exceed the overall limit.
Entrepreneur
Self-employed people who have received unemployment benefits may be able to retrospectively reduce their net business income from a full-time or side job, Grzes said.
This is especially true for entrepreneurs who bought an expensive device in 2020.
Instead of depreciating the asset over several years and making an income deduction each of those years, the tax law allows them to spend the full amount in the first year, Grzes said.
For example, instead of spreading a tax break of $ 5,000 over five years (for a tax deduction of $ 1,000 per year), entrepreneurs can claim the full $ 5,000 for 2020 instead.
These savings would be reflected in your individual tax return.
CNBC’s Carmen Reinicke contributed to the coverage.