The next Covid bill provides for a tax exemption for unemployment insurance benefits of up to $ 10,200. Here’s what you need to know
The latest updates to the $ 1.9 trillion coronavirus aid package could save millions of people from a surprise tax burden.
The Senate passed a version of the Covid aid package on Saturday that is slightly different from the one passed by Parliament. Senate Democrats agreed to cut additional unemployment benefits from $ 400 to $ 300 per week, but extended payments through September.
They also included a provision to waive taxes on the first $ 10,200 in unemployment income for those who had less than $ 150,000 in adjusted gross income in 2020.
Making the first $ 10,200 of unemployment insurance income tax-free is designed to prevent families from experiencing a surprise tax burden during what will be a difficult time for many. In 2020, approximately 40 million Americans earned unemployment insurance benefits. This emerges from a February research report written by Brian Galle and Elizabeth Pancotti for The Century Foundation.
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“Partial tax forgiveness ensures that millions of Americans don’t have to mail their relief checks back to the IRS and instead can put groceries on the table, refill prescriptions and pay rent,” said Pancotti, who is director of Polici Employ America.
These benefits – including the additional $ 600 weekly pandemic unemployment benefit and the additional $ 300 per week under the Lost Wage Support Program – are considered taxable income. People receiving unemployment can choose to withhold 10% of benefits to cover federal tax liability, but less than 40% of beneficiaries appear to have done so in 2020, according to the paper.
In addition, some states did not allow workers receiving unemployment benefits under CARES Act programs to withhold part of their income for taxes.
Whom the bill helps
Pancotti said the provision in the latest business cycle slump will reduce tax liabilities by an average of up to $ 1,020, which will either increase people’s reimbursements or decrease the amount they owe. This could mean even more to people in higher tax brackets, she said.
Of course, those who had unemployment income greater than $ 10,200 in 2020 will continue to be taxed on the rest of the benefits. This could create a tax burden for some based on how much total income they had in 2020.
For example, if a person 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, according to Richard Auxier, senior policy associate 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 withholding and likely not owe tax, he said.
However, if another person had the same unemployment income but also worked part of the year, they could pay taxes on their benefits depending on the rest of their situation.
“All other parts of the tax system intervene,” Auxier said, adding that eligibility for other credits, such as the earned income tax credit or the child tax credit, could change the amount of debt.
This means the benefit will be most helpful for middle-class households or households with incomes high enough in 2020 to owe unemployment insurance taxes, according to Kyle Pomerleau, a resident at the American Enterprise Institute.
What to know about taxes when you are unemployed
However, it will still take some time before the Covid Economic Act comes into force. The House plans to vote again on the legislation on Tuesday and then send it to President Joe Biden for signature.
Even if this happens, it will take time for the IRS and Finance departments, as well as tax advisors and corporations, to implement the new rules and set guidelines for them.
This means that if you had an unemployment income in 2020, the best thing to do is to wait to file your tax return with the IRS even though it’s already mid-filing season. This also means that if you have already submitted for 2020, you will have to submit a modified return, but also have to wait until the invoice is required by law.
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