Covid Bill waives taxes on up to $ 20,400 in unemployment benefits for married couples
Steven Heap / EyeEm / Getty Images
The latest version of the $ 1.9 trillion coronavirus relief package could save millions of people who have lost their jobs due to the pandemic from a surprise tax burden.
On Saturday, the Senate passed a version of the Covid Act that included a provision to waive taxes on the first $ 10,200 of unemployment insurance benefits for those who had adjusted gross income of less than $ 150,000 in 2020.
If both individuals in a tax filing couple shared Unemployment Insurance benefits in 2020, the first $ 10,2000 of that income – a total of $ 20,400 – will be tax waived for as long as their combined gross adjusted income is less than $ 150,000 the latest version of the invoice.
“When you reach $ 150,000, everything becomes taxable, there isn’t even an exit,” said Rhonda Collins, director of tax content and government relations for the National Association of Tax Professionals.
Making the first $ 10,200 of unemployment insurance income tax-free is to prevent families from being hit by a surprise bill 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.
More from Invest in You:
Lost jobs, no childcare: a year after the pandemic, women are not okay
The IRS received 35 million tax returns in a week as Americans raced to file
Smallest businesses can get additional PPP help. What you should know before applying
“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, director of Polici Employ America.
These benefits – including the now expired additional $ 600 weekly pandemic unemployment benefit and the additional $ 300 per week under the Lost Wage Assistance 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 taxes.
Whom the bill helps
Pancotti said the provision in the latest business cycle slump cuts tax liabilities by up to $ 1,020 on average, either increasing people’s reimbursements or decreasing 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. 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 federal tax exempt, according to Richard Auxier, senior policy associate at Urban- Brookings Tax Policy Center.
The remaining $ 9,800 would be taxable, but the person would also enjoy the standard $ 12,000 deduction 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 those who had income enough in 2020 to owe unemployment insurance taxes, according to Kyle Pomerleau, a staff member at the American Enterprise Institute.
What to know about taxes when you are unemployed
However, it will take some time before the Covid Business Act comes into force. The House plans to vote on the legislation again on Wednesday 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 companies, to implement the new rules and provide guidance.
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.
SIGN IN: Money 101 is an 8-week financial freedom learning course delivered to your inbox weekly.
CHECK: Single mom earns $ 10,000 a month in outschool: “I could never have made as much money as a normal teacher” above Grow with acorns + CNBC.
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.