The American bailout creates a tax problem for the unemployed

The Internal Revenue Service building in Washington.

SAUL LOEB / AFP via Getty Images

The US $ 1.9 trillion bailout plan inadvertently created a puzzle for the unemployed this tax season.

The pandemic relief, which was passed by the Senate on Saturday, offers $ 1,400 economic reviews and waives federal taxes on part of unemployment benefits received last year.

However, this raises an important question for some taxpayers who lost their jobs in 2020: should they file their tax returns now for a bigger incentive, or file them later to avoid a heavy unemployment benefit tax burden and have more clarity about it the directive?

The answer has clear tradeoffs on the finances of workers who are in need of money.

“It’s basically a mess,” said Janet Holtzblatt, senior fellow at the Urban-Brookins Tax Policy Center.

“It is a cautionary story about the challenges of introducing a provision this late season that will affect many millions of individual taxpayers,” she added.

$ 1,400 stimulus checks

The relief bill offers stimulus checks up to $ 1,400 per person, including children.

Taxpayers who lost income year-over-year in 2020 – whether due to unemployment or a reduction in working hours – have an incentive to file their income taxes as soon as possible.

According to tax experts, they are more likely to get a boost.

Currently, the legislation would only offer individuals the full check amount of $ 1,400 if their income is less than $ 75,000 per year. (The maximum limit for married couples is $ 150,000.)

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Adults earning more than $ 80,000 – and couples earning more than $ 160,000 – wouldn’t get any payment at all.

It is likely that an unemployed worker’s tax return for 2020 would show less income than the previous year, which increases the chances of a stimulus check.

If taxpayers are delayed, the government would write checks based on 2019 income, which could reduce or disqualify the payment. (They would become whole eventually, but maybe in months.)

Tax relief for unemployment

That rush to look into a bigger incentive, however, runs counter to another aspect of America’s Recue Plan: the Senate-passed bill would waive federal tax obligations for the first $ 10,200 in unemployment benefits.

The provision would apply to households with an income below $ 150,000.

According to a report by the Century Foundation, a progressive think tank, around 40 million people received unemployment benefits last year.

The recipients owe federal tax on this income. Many will also owe state taxes. However, the Century Foundation estimates that less than half have chosen to withhold taxes from their services.

Tax experts advise Americans to postpone filing their taxes at least until President Joe Biden signs the relief bill. He is expected to do so this week.

It would also be best to wait for more clarity on the guidelines from the finance department and the IRS, experts said.

“If it were me and I could afford to wait, I would wait until I knew what the IRS would say to people,” said Holtzblatt.

An IRS spokeswoman declined to comment on pending laws. An official from the Treasury Department also declined to comment.

“The finance department is working on what this looks like and what the processing looks like,” White House press secretary Jen Psaki said Monday of stimulus checks. “We expect a large number of Americans to get relief by the end of the month, but on the mechanics, the Treasury Department just has to work that through.”

Advantage of the tax delay

The delay has several advantages.

For one thing, unemployed workers who withhold no or insufficient tax on their benefits would avoid paying a huge tax burden now – money they may not have given their employment situation.

A tax waiver on benefits of up to $ 10,200 can significantly reduce or eliminate an employee’s tax burden. Taxpayers can ultimately get money back from the IRS if they overpay, but this point in time is unclear.

A delay can also prevent the need to file an amended tax return or take other steps to reclaim funds later.

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