About 40 million Americans collected unemployment insurance benefits last year, according to an analysis by The Century Foundation. If you are among them, filing your 2020 taxes may not be straightforward.
The Covid-19 relief package President Joe Biden signed into law last week retroactively changed the tax rules for unemployment benefits. The American Rescue Plan waives federal tax on unemployment benefits worth up to $10,200 for the year 2020. For married couples filing jointly, each spouse can exclude $10,200 of their benefits. The exemption only applies to tax filers who made less than $150,000 last year, whether they are filing as single or married.
That change in tax law is part of the reason the IRS announced Wednesday that it will delay the federal tax filing deadline until mid-May, giving taxpayers until May 17 to file and pay federal taxes. The deadline delay will give the IRS time to reprogram its computers to include the new tax provision, explains Howard Samuels, a certified public accountant at Samuels & Associates in Florham Park, New Jersey.
In order to take advantage of the tax break on unemployment benefits, here's what you need to know about filing your 2020 taxes, according to Samuels.
If you filed your 2020 taxes before the American Rescue Plan was signed into law and didn't take advantage of the unemployment tax break, the IRS is strongly urging you to hold off on amending your return.
"For those who received unemployment benefits last year and have already filed their 2020 tax return, the IRS emphasizes they should not file an amended return at this time, until the IRS issues additional guidance," the IRS wrote in a March 12 announcement.
As Samuels explains, "They plan on coming up with some methodology for people who already filed that could have excluded that $10,200. It might be a single form. They might just re-compute those people's taxes and send them an additional refund. They need a couple more weeks to figure out how they're going to handle that."
It's possible you won't have to file an amended return at all. "We believe that we will be able to automatically issue refunds associated with the $10,200," IRS Commissioner Charles Rettig said during a congressional hearing Thursday.
Many advocates have called for the IRS to proactively issue refunds to taxpayers who overpaid, including Senator Richard Durbin, D-IL, and Congresswoman Cindy Axne, D-IA. In addition, 19 members of the House and Senate have urged the IRS to automatically issue refunds without requiring taxpayers to file amended tax returns.
Traditionally, experts suggest you file as soon as possible. But if you haven't filed your 2020 taxes and you collected unemployment, your best bet is to wait until the IRS explains how it will process the retroactive tax benefit. "If you haven't filed yet, my suggestion is to sit tight for another week or two when the government is going to provide more guidance on exactly how [unemployment] should be reported," Samuels says.
A lot of Americans are counting on collecting a much-needed refund check or unclaimed stimulus money. Filing before the IRS issues guidance on unemployment could end up delaying your refund. "It could just get tied up further and things could take even longer," Samuels explains.
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Solutions are coming quickly. The IRS has provided a worksheet for paper filers, and in a March 12 statement, said it is working with the tax software providers "to update current tax software so that taxpayers can determine how to report their unemployment income on their 2020 tax return."
The American Rescue Plan's $10,200 tax break on jobless aid only applies to federal income tax.
The average unemployment beneficiary received a total of about $14,000 in unemployment benefits last year, according to The Century Foundation. Since the tax break included in Biden's relief plan only counts towards the first $10,200 of jobless aid, any remaining portion of that benefit is still subject to federal taxes.
Depending on where you live, you may also need to pay state or local taxes on your unemployment benefits. At the federal level, unemployment is normally taxed as ordinary income; but state by state, tax rates vary, as does whether unemployment benefits are viewed as income.
Many states that currently tax unemployment benefits have yet to decide whether they will allow those state taxes to be waived as well.
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