When large swaths of the world shut down last year in response to COVID-19, it helped make the literal life-or-death medical situation less devastating (relatively speaking).
But the coronavirus closures also created damaging economic fallout. Businesses shuttered their doors, some permanently. Associated companies took hits. Employees lost their jobs.
In the United States, federal coronavirus relief legislation provided some help. However, it also produced unwelcome side effects.
Surprise unemployment taxes: Millions of laid-off workers eagerly accepted unemployment benefits to help cover costs that didn't stop. But when the 2020 tax season arrived, many realized to their dismay that they owed taxes on the assistance checks.
The good news is that the latest COVID-19 relief bill, the American Rescue Plan Act (ARPA), decreed that recipients don't owe tax on up to $10,200 in unemployment benefits. That is a huge relief to the approximately 40 million Americans that The Century Foundation says got unemployment insurance (UI) payments last year.
The even better news is that UI recipients who filed their tax returns before ARPA became law on March 11 don't have to worry about filing an amended tax return to get back those taxes they paid.
Commissioner confident about automatic refunds: Internal Revenue Service Commissioner Chuck Rettig told the House Ways and Means Oversight Subcommittee on Thursday, March 18, that his agency will automatically send refunds to early return filing unemployment recipients who qualify.
The $10,200 tax exemption on 2020 unemployment benefits is available to individuals who earned less than $150,000 last year. The earnings cap applies to all five filing statuses.
"We believe that we will be able to handle this on our own. We believe that we will be able to automatically issue refunds associated with the $10,200," Rettig told the tax-writing subcommittee members.
No amending necessary: The IRS promise of automatic employment-related refunds means that many recipients of unemployment benefits who have already filed their 2020 tax returns won't have to go to the added hassle of filing an amended return to get back their now-overpaid tax money.
As for taxpayers who got unemployment but haven't filed a Form 1040 yet, the IRS says they can go ahead and file using the new Unemployment Compensation Exclusion Worksheet and updated instructions issued last week. If you use tax software, be sure to check that it also has updated with the new tax-free unemployment data.
And they, like all taxpayers, have extra time to get their returns, regardless of whether unemployment is part of the filing, right. The IRS has extended the 2021 tax filing deadline to May 17.
Unemployment tax break cost: The Joint Committee on Taxation estimates the unemployment exemption in the ARPA will reduce federal revenue by $24.9 billion.
That's not an insignificant number, but realistically it's a pittance in a $1.9 trillion bill. The just under $25 billion is just around 1.3 percent of the whole relief measure's cost.
Even if you argue against the expenditure from a pure fiscal standpoint, from the political and human decency standpoints, it's a price that needed to be paid.
Many of the people who got the out-of-work benefits don't have the money now to pay tax on them. That would create a whole new set of problems for the affected individuals and IRS collections.
We got numbers, lots 'o numbers: There are a lot of figures in this post.
They include:
- $10,200 in tax exempted unemployment benefits;
- 40 million laid-off workers who got the assistance payments;
- $150,000 earnings cap for the UI tax relief;
- $1.9 trillion cost of ARPA;
- 24.9 billion in tax revenue lost to the unemployment relief provision; and
- 17 as the day in May that's the new federal (and many states') return filing deadline.
It was a tough call, but I'm going with $10,200 as this weekend's By the Numbers selection.
While it's the smallest of the dollar figures in this post, it's the most immediate for those who got unemployment benefits. At the lowest current individual tax rate of 10 percent, that translates into an additional $1,020 for unemployed filers.
And that's a nice chunk of now nontaxable change
You also might find these items of interest:
- IRS elaborates on delivery of $1,400 COVID relief payments
- 90 million COVID relief checks delivered. How to find your EIP's status
- The child care tax credit is a good claim on 2020 taxes, even better for 2021 returns
| Coronavirus Caveat & More Information In 2021, we're still dealing with extraordinary circumstances, both in our daily lives and when it comes to our taxes. The COVID-19 pandemic and efforts to reduce its transmission and protect ourselves and our families means that, for the most part, we're focusing on just getting through these trying days. But life as we knew it before the coronavirus will return, along with our mundane tax matters. Here's hoping that happens soon! In the meantime, you can find more on the virus and its effects on our taxes by clicking Coronavirus (COVID-19) and Taxes. |
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Sarah
So, my husband and I filed our taxes together early. I recieved unemployment benefits. We ended up paying $1389 in taxes and then when they re-evaluated our taxes with the relief bill. I got a check for $2.60. The tax bill literally saved us nothing. We made $50K under the threshold for stimulus so we at least finally got that. Meanwhile, my daughter and son in law got back a check for $13,000 while child tax credits and what not. How is this even possible? This is just crazy to me.
Deborah Palmer
I filed my taxes on February 12th, 2021. I also had unemployment. Due to the early file, my tax return continues to say still processing. Guess they are using my refund interest free. Due to this “still processing”, have NOT received my stimulus either?
Lial
Yes you should say least do the math first and if you can file you should. Sorry, but when they still haven’t given any dates about money that people already paid they are basically saying
they’re making you wait to use this money that was already yours. It’s like giving them a loan without a repayment date.
Kay Bell
They can be every two weeks, at least here in Texas. Thanks for this note. I’m taking out the delivery time reference.
Pablo J
Regarding the statement “many realized to their dismay that they owed taxes on the monthly assistance checks”, is there is any state which issues unemployment benefits monthly? I’ve never known anyone to receive unemployment benefits on other than a **weekly** basis.