Taxpayers who received unemployment benefits this year shouldn’t expect another tax cut in the next filing season, financial experts say.
Unemployment benefit is generally treated as taxable income. However, federal legislators waived taxation of some of these benefits received in 2020 after the Covid-19 pandemic caused an unprecedented number of people to tap into the unemployment system.
Individuals who continue to move may not get a similar hiatus from benefits in 2021, which could leave millions of them charged for these taxes when they file their tax returns the next year.
According to the latest data from the Department of Labor, more than 14 million people were receiving benefits as of June 19.
“This provision was created in a year we had record unemployment,” said Janet Holtzblatt, senior fellow at the Urban-Brookings Tax Policy Center, of the tax break. “Fortunately, the economy has improved, which really reduces the likelihood of an extension.”
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The American bailout plan, which President Joe Biden signed in March, excluded up to $ 10,200 per person of 2020 unemployment benefits from federal income tax. (Only those with income less than $ 150,000 were eligible.) Some states followed suit with their own tax breaks.
It is unclear how many people qualified and received the federal tax break because the IRS has not yet processed all tax returns, according to an agency spokeswoman.
The Century Foundation estimates that approximately 40 million people received unemployment benefits over the past year. Some would have received a larger or surprising tax bill for 2020 without the partial federal tax relief.
This is because states that administer unemployment benefits are supposed to offer recipients the option to withhold 10% of benefits to cover part or all of their tax liability. But many unemployed workers with a lack of money, many of whom are new to the unemployment system, may not have chosen to withhold.
Some states also did not offer workers an option for certain pandemic-era unemployment programs, according to The Century Foundation.
As a result, less than 40% of unemployment benefits were withheld in taxes last year, the group predicts.
“Last year, for the first time in their lives, so many people were unemployed,” said Holtzblatt. “You were really caught by this big surprise at the end of the year.”
There are steps those in receipt of unemployment benefits can take to prepare for a potentially hefty bill during the early 2022 tax season.
For one thing, recipients should choose to withhold the 10% tax if they can afford it, said Andrew Stettner, a senior fellow at the Century Foundation.
You can fill out Form W-4V, a voluntary withholding tax application, and submit it to the government agency that pays the benefits, according to the IRS.
“If you can’t afford it, at least remember that when you go back to work you’ll have to save up for it,” said Stettner.
However, depending on income and other factors, even a 10% withholding tax rate may not be high enough to fully cover the tax.
Recipients who have not deducted tax from benefits or who believe they have underpaid can choose to make quarterly estimated tax payments, according to the IRS.
Families willing to get child tax credit prepayments in July – up to $ 300 per month per child – could also put some of those funds aside, he said.
“I don’t think it’s a done deal,” said Stettner, saying that there will be no further tax breaks. “People should always prepare for the worst case scenario rather than the best case.”