Keeping away the taxman

There it is, on pages 299 to 301, of the 628-page long American Rescue Plan Act of 2021: Title IX, part 4, section 9042, “Suspension of tax on portion of unemployment compensation.” What it means is that Congress came to its senses in the $1.9 trillion COVID relief bill and exempted from taxes up to $10,200 per person in jobless benefits for those with incomes under $150,000.

Had lawmakers not acted, tens of millions of Americans who were out of work during the COVID year of 2020 and collected unemployment, as they were entitled to, would have to pay the IRS taxes on that assistance. His colleagues should have listened much earlier to Illinois Sen. Dick Durbin, the No. 2 Democrat in the chamber, who six months ago was raising the issue and introduced legislation. The long delay, now a month after tax season opened and millions of returns having been filed, will result in massive numbers of amended returns.

Durbin reasoned, correctly, that it’s nonsensical for the federal government, which has been enacting emergency laws again and again to pump out trillions of dollars into the shattered economy to keep people housed and fed, to then tax that aid money and grab some of it back. The direct payments were tax-free. The same should have applied to unemployment and Congress should have included the exemption in one of the many COVID bills passed last year. But they didn’t.

While it’s terrific that they finally acted, there’s a new problem. IRS Commissioner Chuck Rettig on Jan. 15 set tax season to open Feb. 12, when the IRS begins accepting returns. When the Biden team came in on Jan. 20 with their plan to rewrite the tax code, they should have had Rettig push back the start of tax season. Because that didn’t happen, more than 55 million returns for 2020 were filed in the first three weeks, with millions more being filed every day. And those returns were calculated when 2020 unemployment was fully taxable.

Many people rushed to file because under the American Rescue Plan, the IRS was going to use the most recent return on hand, be it from 2020 or 2019, to decide who would get those $1,400 direct payment checks and it was more beneficial for some to have it determined under their 2020 return.

So much for an advantage to early filing. Millions will now have to submit amended returns to get back from Washington taxes they just overpaid on their unemployment or, in some instances, to receive augmented refunds, as the new exemption of $10,200 (and $20,400 for married couples) would increase those refunds.

Then there’s the matter of state taxation. Places like New Jersey and California never tax unemployment. Others, like New York and Connecticut, follow the feds and do levy a tax. But as Washington has now filled state treasuries, they should all exempt the same $10,200. The chair of the Senate Labor Committee in Albany, Jessica Ramos, says it’s only right.

And she is right.