This year has been unique in many ways — from social distancing to mask-wearing, work-from-home policies and Zoom meetings — and one Americans will never forget.
And many may not realize the 2021 tax season will also be unique and hit some people harder than others.
U.S. tax law considers unemployment benefits as earned income. It means those payments are calculated as an individual’s income, with each taxpayer getting a 1099-MISC form in February.
Hundreds of thousands of Americans received unemployment benefits when the pandemic shut down businesses, as well as the additional $600 per week stimulus under the federal CARES Act. All of those payments will be taxable income in April 2021.
Benny Carter
Benny Carter, managing partner of Rowland and Carter CPAs, said people usually draw unemployment for “six weeks up to three months or so.” This usually does not greatly affect someone’s tax burden the following year.
But with the ongoing pandemic, many people have drawn unemployment for a much longer time, and for three months, those individuals received an additional $600 per week through July 31. This means some individuals may open their mailboxes in February and be in shock at the dollar amount on their 1099-MISC form.
“This year will be a horse of a different color,” Carter said. “You’re going to have people who didn’t elect, either in the state of Tennessee or Mississippi, to have withholding taxes taken out of those unemployment checks.”
Carter assumes most individuals who have received or are receiving unemployment benefits did not have taxes withheld and likely may not realize the tax burden they may see come April 15.
Gregory Haynes, another CPA in Memphis, said many people will be “surprised come tax time.”
“As for the tax bite caused by the unemployment benefits, that of course depends on the taxpayer’s amount of income from all sources,” Haynes said. “Depending on factors such as total 2019 tax liability, come April 15, one could owe additional tax caused by the unemployment benefits, plus an underpayment penalty.”
Gregory Haynes
Haynes advises people to project their 2020 income tax liability now, substituting total current-year earnings and unemployment benefits in place of 2019 W-2 taxable income.
Prior to the pandemic, the maximum unemployment benefits for someone in Tennessee was $275 per week.
Early in the pandemic, many restaurant workers and others in the service industry who were laid off because of the shutdown actually earned more money monthly with the $600 a week federal payout and the state unemployment benefit than they were making monthly at work, making their taxable income higher than it might have been otherwise.
“If they’re (unemployment recipients) not in a refund situation already, all of the sudden, they’re going to owe quite a bit of taxes that they probably don’t have,” Haynes said, noting that it could be a “drastic” situation for people who didn’t plan for the tax implications.
Carter recommends individuals who received unemployment to ask their CPA or do some research to determine how much of a tax hit they may be getting in 2021.
“If it’s going to reduce their refund, it’s not that big of a deal,” he said. “If it’s going to create a tax liability, they need to be saving.”
As far as the $1,200 stimulus checks that many Americans received, that will not be counted as taxable income. The stimulus checks were based on 2020 income projections. If it turns out that an individual or family received too much stimulus money based on their 2020 income, the government is going to forgive the overage.
If someone did not receive the stimulus or received a reduced amount, if it turns out that they should have received more, they will get an increased tax return.
“There’s going to be some people, some couples that got $2,400, and once they do their 2020 tax return, they probably shouldn’t have gotten that much, but they won’t have to pay back the difference,” Carter said. “If you didn’t get enough, then you can get more (refund).”
The IRS does not normally release new tax forms until the end of the tax year. However, Haynes expects a line for any such shortfall in stimulus payments to appear on Schedule 3 of Form 1040, in the Refundable Credits section.
“It’s (2021 tax season) going to be very interesting,” Carter said. “We specialize in the construction business, and, knock on wood, most of our contractors haven’t let up all year. I probably won’t see a lot of it, but H&R Block is going to see a lot of it.”
To have federal income tax withheld from unemployment benefits, Haynes said individuals can submit to the Tennessee State Department of Labor the Form W-4V, Voluntary Withholding Request. As an alternative, individuals may make an estimated tax payment to the IRS using Form 1040-ES by Jan. 15, 2021.
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November 29, 2020 at 05:00PM
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Unemployment recipients may be surprised come April 15 - Memphis Local, Sports, Business & Food News - The Daily Memphian
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