Part of unemployment benefits for 2020 can be deducted from taxes: what you need to know
While unemployment benefits are considered income and are taxable, the recently signed $ 1,9 trillion bailout plan will not be subject to federal income tax on the first $ 10 in unemployment benefits received by a person in 200. The edition told in more detail Market Watch.
The tax exemption applies to households with incomes below $ 150. Such an innovation can lead to tax savings for individual households from $ 000 to $ 1000.
This provision came into effect after Americans have already filed at least 55,7 million tax returns with the IRS.
At least some of these returns came from people seeking a much-needed return after a tough 2020 that pushed them to the brink of unemployment. They have now filed their tax return before accessing a benefit designed to help people like them.
Experts said taxpayers who received unemployment benefits and did not file their tax returns should wait a little longer.
Taxpayers who have already filed documents should also wait, they say. But these people should be prepared for the fact that they will have to file a revised tax return, which will require a refund. This is done using Form 1040-X.
“Amending your tax return basically means that you resubmit your tax return, but you don't count the $ 10 in unemployment benefits,” say The Century Foundation. "Depending on your tax rate, this could result in a check refund for more than $ 200."
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The plan does not tell you what to do with the IRS if someone has already filed a return.
“This will give the IRS time to figure out how to handle these types of returns and will allow tax software companies to update their systems,” said Robert Kerr, a Washington-based tax consultant.
“It's in everyone's interest to get this quickly resolved,” Kerr said.
He reckons that a couple making just under $ 150 can expect potential savings of $ 000.
“For some, this will be a surprise. For others, it is an averted tragedy, ”he said.
Lawmakers have tried to keep taxpayers safe from unexpected tax bills. Polls show that many people are unaware that unemployment benefits are taxed.
In one poll by Jackson Hewitt, a national tax collection network, 61% of people receiving unemployment benefits said they either did not withhold income tax money when they received unemployment benefits, or they did not save money in an unpaid account.
US President Joe Biden signed the bill into law on Thursday, March 11.
Rep. Cindy Exney and Senator Richard Durbin (both Democrats) sent a letter asking the IRS and the Treasury Department to quickly clarify what people should do next if they have already filed a return.
They hope these taxpayers don't have to do anything.
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They and 19 other lawmakers who signed the letter want the IRS to check if the agency can automatically correct the data, instead of requiring revised declarations.
If it doesn't, lawmakers are urging the IRS to provide "clear and accessible information" about filing revised returns.
In addition to a possible tax deduction of at least $ 1000, legislators noted that lower taxable income affects a person's eligibility for other tax provisions, such as a higher child tax credit and an earned income tax credit.
The IRS said more details on various parts of the law will be available on the agency's website at a later date.
Be aware that the $ 10 income tax exemption applies only to federal income taxes, not state income taxes.
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State income tax rules may vary
According to The Century Foundation, each state's policies regarding taxation of unemployment benefits will be different. California, for example, does not tax unemployment benefits, while other states' income tax policies reflect the federal stance.
About 12 states lack specific rules for taxing unemployment benefits, which means that a taxpayer may have to include unemployment income on their tax return, the researchers said.
These states include Georgia, Hawaii, Indiana, Iowa, Kentucky, Maine, Mississippi, North Carolina, Oregon, Vermont, and West Virginia.
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