TheThe law signed last week includes a welcome tax break for the unemployed. The act waives federal income taxes on unemployment insurance benefits of up to $ 10,200 for those earning less than $ 150,000 a year, potentially saving workers thousands of dollars. States that currently tax unemployment benefits have yet to decide whether they can waive these state taxes as well.
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 office that is already behind schedule thanks to a lack of staff and backlogsDisruptions.
More time to cast off
In good news for confused taxpayers, the IRS extended the tax filing deadlineAfter several members of Congress, including House Ways and Means Chairman Richard Neal and Subcommittee on Oversight Chairman Bill Pascrell, pressed for a delay.
The move means workers who have received unemployment benefits in the past year will have some respite to find out what the changes to the tax law mean for them.
Texas residents now have until mid-June to submit their returns. The IRS expanded thatMillions in the state were left without electricity and water after a deadly winter storm.
Wait, unemployment is taxable?
Most years yes. The federal government considers unemployment benefits to be taxable income, although taxes are not automatically withheld from benefit payments, just like an employer might deduct taxes from your paycheck. Instead, unemployed people must request that tax be withheld from their benefits, and the withholding is capped at 10%.
This led tofor the unprecedented number of workers who received unemployment benefits for part of 2020 and filed their taxes for the year, only to find that their typical refund has been reduced – or, in some cases, to learn that they owe money.
Michigan-based Bridget Harwood took three months off from her job as a medical assistant last year when many stores in her town closed. The unemployment benefit she received during this period resulted in a lower tax refund this year as well. Instead of the roughly $ 1,500 refund she normally gets, she got only $ 72 back.
“It was definitely a shock,” said Harwood.
It was even worse for Harwood’s eldest daughter, who worked in a fast food restaurant before the pandemic drove her into unemployment. Harwood completed her daughter’s tax return and found she owed $ 1,000 in federal and state taxes. When Harwood explained the situation to her daughter, who was expecting a refund for a new car, “she started crying,” said Harwood.
If you’ve received benefits and filed your 2020 taxes, wait
Taxpayers who received unemployment income last year and have already filed their 2020 tax returns should wait before filing an amended return, according to the IRS.
“For those who received unemployment benefits last year and have already filed their 2020 tax return, they shouldn’t file an amended tax return right away as the IRS is issuing additional guidance,” Commissioner Chuck Rettig told a Congressional subcommittee on Wednesday.
Many advocates have urged the IRS to proactively provide refunds to taxpayers who have paid too much. Those advocates include Senator Dick Durbin of Illinois and Rep. Cindy Axne of Iowa, who along with 19 members of the House and Senate called on the IRS to automatically issue refunds without the need for revised tax returns.
Nina Olson, the former lawyer for the National Taxpayer, told Politico that such an automatic correction of already filed tax returns is within the possibilities of the IRS. The alternative – digging through a mountain of altered returns – “really creates more processing overhead for the IRS,” which started this season behind last year, Olson said.
While the tax change is welcome news, it is also confusing for many.
“People are asking so many questions about how it works – people who have filed their taxes and want to know they need to change their returns,” said Stephanie Freed, founder of ExtendPUA.org, a group founded last year that advocates this is what uses unemployed people. Freed estimated that the small group has heard from several hundred people since last week asking for guidance on their tax returns.
If you haven’t filed your taxes: wait
“Wait a moment” is also the message from the IRS to taxpayers who have not yet submitted any documents.
The IRS said it will “provide a paper filing worksheet and work with the software industry to update current tax software” to make it easier for people to report unemployment benefits. Tax professionals say it will take at least a few days, if not longer, for tax software to reflect recent legislative changes.
“I have two batches of returns that I currently can’t file,” said Rob Seltzer, a Los Angeles-based CPA. “I have a client who has $ 15,000 in unemployment. If I filed her return it wouldn’t work,” he said.
Will states also waive taxes?
Some states are expected to amend their tax laws to follow federal guidelines. States like Alabama, California, Montana, New Jersey, Pennsylvania, and Virginia already exempt unemployment benefits from taxation. Other states that normally tax unemployment tax may opt out this year.
ExtendPUA.org is urging that all states follow the example of the federal government and exempt unemployment benefits from taxation, Freed said.
“I’m a New Yorker and I still have a significant tax burden from state and local taxes,” she said. “Many states follow federal guidelines for them to include this forgiveness, but there are about 12 that don’t. New York is one of them and it has some of the highest taxes in the country.”
Billions in savings
Under the changes to the new tax law, a person who was unemployed for part or all of 2020 could potentially save thousands in taxes. Someone who received unemployment benefits of $ 10,200 or more and is in the 10% tax bracket could save $ 1,200 in federal income tax provided their adjusted gross income for the year was less than $ 150,000. Taxpayers in higher tax brackets would save more.
However, the last minute changes threaten to complicate an already challenging filing season.
The law “will include a wrench in the 2020 filing,” said Jonathan Medows, a Manhattan-based CPA. “It’s a cascade – the IRS is backed up, software companies are backed up, practitioners are backed up.”
Medows is also holding back from filing its clients’ returns until the IRS clarifies its rules.
“My customers are impatient about wanting refunds and stimulus payments, but I’m waiting,” Medows said. “I have to file modified returns and now I’m personally slowing things down. I won’t finalize things until we get instructions.”