Tax season is here and many of the people who were unemployed due to the coronavirus are wondering how much they have to pay back the government this year.
Beginning March 15, 2020, billions of people were laid off as the pandemic shut down the world. 40 million Americans had to ask the government for unemployment insurance (UI). Unemployment insurance is state-provided insurance paid to individuals who lose their job due to a fault of their own. The amount they receive is similar to or of equal value wage from their previous job.
The Congress enacted three relief packages, one with an extension that came later, targeting these particular individuals through the CARES Act:
- Pandemic Extended Unemployment Compensation (PEUC)
- 13 additional weeks of UI to workers still unemployed after their initial 26 weeks of state benefits are used
- Pandemic Unemployment Assistance (PUA)
- Ineligible workers to receive 39 weeks of unemployment benefits (46 weeks in some states)
- Includes self-employed workers, part-time workers, low-wage earners, and workers unable to work for Covid-19 related reasons.
- Federal Pandemic Unemployment Compensation (FPUC)
- Added $600 weekly benefit of unemployment benefit payments for 17 weeks between April -July 2020
- Extended between January – March 2021 for 11 weeks, only $300 weekly benefit
- Continued Assistance for Unemployed Workers Act (CAUW)
- Passed in December 2020, extending 24 weeks to previous program
- Adding 11 weeks in 2021
The Century Foundation discovered that 18 million Americans are still claiming benefits where 5 million others have exhausted all benefits prior to the year.
UI benefits are commonly considered taxable income. State unemployment agencies are required to offer the option to withhold 10% of benefits for federal income taxes. Unfortunately, some states did not immediately have this option. Plus, many unemployed Americans could not afford a 10% reduction on their UI benefits due to their UI benefits only being 40% of their previous wage.
This means that families could owe thousands of dollars on their 2020 taxes instead of getting money back on their income tax return. The Department of Treasury needed to let people know that these benefits would be tax free under federal law.
In response to this problem, the Biden administration was able to transfer $21.85 billion UI to the IRS for tax withholding. Still, $580 billion was sent to the unemployed during the pandemic which means only 4% of that money is covered.
On February 2, 2021, the Coronavirus Unemployment Benefits Tax Relief Act was enacted to help delete $10,200 from each unemployed individual’s federal income tax if they were expected to pay. This act will only affect people who have an “adjustable” income under $150,000. Thankfully, some tax assistance companies, like Tax Axe, have already updated their system to assist users with this plan.
If you haven’t opted into withholding while still receiving unemployment benefits, do so as soon as possible. To request withholding, you’ll have to fill out the W-4v form. You could do this through your benefit portal on the IRS website, depending on your state.
If your state didn’t give you the option to withhold then you should set aside some money yourself. By setting up a savings account to pay any income taxes you will want to thank yourself later just in case.
Thankfully, there’s one government benefit you don’t have to worry about paying back; your stimulus checks. The IRS does not see it as income which can’t be taxable. This also means stimulus checks will not reduce or increase the amount needed to be owned.
To find more on tax information, head on over to The Tax Axe today!
