Search

Unemployment Tax Break: Don't Amend Your 2020 Tax Return Quite Yet to Claim the New Exemption - Kiplinger's Personal Finance

seimuy.blogspot.com

Americans who received unemployment benefits last year can claim a special new tax break included in the $1.9 trillion American Rescue Plan Act recently signed by President Biden: Up to $10,200 of unemployment benefits received in 2020 is exempt from federal income tax for households with an adjusted gross income under $150,000. If you're married, you and your spouse can each exclude up to $10,200 of unemployment compensation. Normally, Uncle Sam fully taxes unemployment compensation (just like wages), so this is a big break for many people who lost their job last year and were facing a big – and possibly unexpected – federal tax bill on the tax returns their filing this year.

But there's still one big question surrounding this new tax exemption: How do you claim it? The IRS doesn't have an answer for everyone yet – but it's working on it. How to handle the new tax break will also depend on whether or not you already filed your 2020 tax return. If you haven't filed yet, the IRS has updated the Schedule 1 (Form 1040) instructions and provided an Unemployment Compensation Exclusion Worksheet for paper filers. It's also working with tax software companies to update their products so that users will be able to claim the exemption on their 2020 tax returns. So, if you received unemployment compensation last year, you might want to wait a little bit longer before using one of these software products to complete your 2020 return. That will give the software provider time to make the necessary adjustments.

It's a little more complicated if you already filed your 2020 tax return. The knee-jerk reaction for many people is to file an amended return to claim the unemployment tax exemption. However, the IRS expressly stated that you "should not file an amended return at this time, until the IRS issues additional guidance." So, again, you should wait before taking any action to claim the new $10,200 tax break for unemployment benefits.

What might that "additional guidance" be? It could just be special instructions related to the filing of an amended return. However, another possible option is having the IRS automatically adjust the reported taxable income and issue refunds to people who already filed their 2020 tax return and reported unemployment compensation. This is what a group of 21 Democratic lawmakers requested in a recent letter to Treasury Secretary Janet Yellen and IRS Commissioner Charles Rettig. We don't know if the IRS will go that route, but we should know something soon since the April 15 tax filing deadline is not that far away.

[Stay on top of all the new stimulus bill developments – Sign up for the Kiplinger Today E-Newsletter. It's FREE!]

Additional Tax Benefits

If you qualify for the 2020 unemployment compensation exemption, you may end up getting additional tax breaks, too. That's because your adjusted gross income (AGI) will be reduced by up to $10,200 (up to $20,400 for married couples filing a joint return). That means you could suddenly be allowed to claim other tax breaks with an AGI-based eligibility cut-off, or claim a larger amount for a tax break with an AGI-based phase-out, such as the earned income tax credit, child tax credit, retirement saver's credit, American Opportunity credit, Lifetime Learning credit, or student loan interest deduction. A reduced AGI could also mean a larger third stimulus check, since the eligibility for and amount of these payments is tied to your 2020 AGI.

2021 Unemployment Benefits and Taxes

The new tax exemption only applies to unemployment benefits received in 2020. So, if you receive unemployment compensation in 2021 or beyond, expect to pay federal tax on the amount you get.

To avoid big tax bill when you file your 2021 return next year, consider having taxes withheld from any unemployment payments you receive this year. Contact your state unemployment office to have federal income taxes withheld from your unemployment benefits. You may be able to use Form W-4V to voluntarily have federal income taxes withheld from your payments. However, check with your state to see if it has its own form. If so, use the state form instead.

You can also make estimated tax payments as an alternative. You can pay all your estimated tax by April 15, 2021, or in four equal amounts by the following dates:

  • 1st payment – April 15, 2021
  • 2nd payment – June 15, 2021
  • 3rd payment – Sept. 15, 2021
  • 4th payment – Jan. 18, 2022

You don't have to make the final payment if you file your 2021 tax return by January 31, 2022, and pay the entire balance due with your return.

State Taxes on Unemployment Benefits

Just because the federal government is waiving taxes on the first $10,200 of your 2020 unemployment benefits, that doesn't mean your state will too. Although some states don't tax, or don't fully tax, unemployment compensation, most states do. However, a handful of states exempt unemployment compensation just for 2020 and/or 2021 to help residents impacted by the pandemic. To see how your state treats unemployment benefits, see Taxes on Unemployment Benefits: A State-by-State Guide.

Let's block ads! (Why?)



"claim" - Google News
March 16, 2021 at 04:36AM
https://ift.tt/3tlN1uC

Unemployment Tax Break: Don't Amend Your 2020 Tax Return Quite Yet to Claim the New Exemption - Kiplinger's Personal Finance
"claim" - Google News
https://ift.tt/2FrzzOU
https://ift.tt/2VZxqTS

Bagikan Berita Ini

0 Response to "Unemployment Tax Break: Don't Amend Your 2020 Tax Return Quite Yet to Claim the New Exemption - Kiplinger's Personal Finance"

Post a Comment

Powered by Blogger.