BILKED OF BENEFITS
What to do if you’re a victim of unemployment fraud.
If you got unemployment during 2020, you might expect Uncle Sam to ask for some federal taxes.
Not so this year.
The IRS issued instructions that up to $10,200 of unemployment benefits won’t be taxed. That’s because the Biden administration’s $1.9 trillion American Rescue Plan excluded that sum for the 2020 tax year.
This tax season is shaping up to be bizarre. The final rules are still in flux. Accountants lack all the answers. And even some commercial filing software hasn’t been fully updated.
Take those who already filed returns and included tax payments for unemployment. The IRS is advising those taxpayers not to do anything yet until the agency has updated the rules.
It could take the IRS 30 to 45 days to reprogram computer systems to account for the American Rescue Plan.
That adds a new level of complexity to taxes, accountant Steve Ramm of Philadelphia said.
Consider waiting until tax software has been updated and the IRS website, too, he advised.
And on Wednesday, the IRS announced that it’s delaying the traditional tax filing deadline from April 15 until May 17, as was done in 2020.
Unemployment benefits have been taxable since the 1980s. However, the explosion of pandemic-era unemployment, plus the arrival of the new stimulus bill, have created a massive tax mash-up for Americans in 2020.
The $10,200 income exclusion is intended to cover 17 weeks of the $600 federal benefit passed under last spring’s stimulus bill.
“From rebates to tax credits, there is a lot to unpack,” said Julio Gonzalez, CEO of Engineered Tax Services of West Palm Beach, Fla. He helped advise Congress on the 2017 Tax Cuts and Jobs Act.
“There is so much more in this (relief ) bill that many Americans do not yet know about, or how to best utilize.”
Unemployment worksheet
It is not clear if those who already filed 2020 returns will have to file amended returns or if the IRS will adjust the returns for them automatically, accountants said.
There is a worksheet the IRS is developing to calculate the amount of unemployment that is taxable.
But “these calculations are very complex,” said David Zalles, a certified public accountant in Blue Bell, Pa.
For example, the IRS calculates the tax exemption based on “modified” adjusted gross income. This is important for taxpayers who are self-employed, sole proprietors or independent contractors. These folks can adjust for 50 percent of their self-employment tax, health insurance premiums (including Medicare for taxpayer and spouse), and IRA, SEP, SIMPLE and solo 401(k) retirement plan contributions, Zalles said.
Other adjustments allowed for all taxpayers include student loan interest, up to $2,500.
Tax professionals will have to determine if savings are greater for filing separate or joint tax returns for married folks, “which until now has been beneficial in most cases,” Zalles said.
Stimulus payments
Now comes the third round of stimulus payments.
Didn’t get the first and second payments? You can claim the 2020 Recovery Rebate Credit. But you must file a 2020 tax return even if you don’t normally file.
Visit the IRS website to claim your 2020 Recovery Rebate Credit. For the latest updates, check IRS.gov/coronavirus.
Under the American Rescue Plan, the third round of payments total $1,400 per adult and $1,400 per dependent, which includes children over 17 and even dependent older parents.
Individuals who earn $75,000 or less are slated to receive $1,400, and couples making $150,000 or less will be paid $2,800.
To check if your money’s coming, visit the IRS “Get My Payment” link: www.irs.gov/coronavirus/get-my-payment.
Payments were to have been mailed out or deposited starting last week, and that money is not taxable.
“I have no idea if these are initially only to taxpayers who had entered their bank account information on their 2019 tax returns or if they will be direct depositing to bank accounts for Social Security recipients,” Zalles said. “Also, people who filed their 2020 tax returns already should not expect that the IRS will update their records for bank information on those 2020 tax returns.”