How to claim your unemployment tax break under new stimulus
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The latest coronavirus stimulus package comes with some new twists in the form of tax benefits that will put money in the hands of many Americans, especially parents and those who were unemployed last year. Plus there are other lingering tax situations brought on by the pandemic. This is beyond the fairly straightforward formula of $1,400 a person in stimulus money for most people, other than those with higher incomes (phasing out completely at $80,000 for individuals and $160,000 for joint filers).
So in the midst of tax season, here are some answers and where things are in limbo.
Tax-free unemployment benefits
The new stimulus package, called the American Rescue Plan Act of 2021, makes tax-free a big chunk of unemployment benefits tax-free people received last year. Here’s how it works.
Households with income of less than $150,000 will be able to deduct up to $10,200 unemployment benefits from their 2020 income in filing their taxes this winter or spring.
The value of this will vary depending on where you fall in the tax brackets. For a family with $100,000 in taxable income, this means a savings of $2,244 in taxes. For someone making around $40,000, the savings would be $1,205.
After deductions, income for individuals is taxed at 10% up to $9,875, then 12% from there to $40,124 and then at 22%. For joint filers, income up to $19,750 is taxed at 10%, then at 12% from there to $80,251 and then at 22%.
But passing a tax break for 2020 when the tax filing season has already begun raises some questions. Will the IRS create a new form 1040? What about people who have already filed?
A spokesman for the IRS said just ahead of the signing of the law, “I can’t speculate on pending or possible legislation. I think that talking to the bill’s sponsors would be your best bet.” There was no update by Friday.
It’s possible that people will have to file an amended tax form if they qualify for this benefit, Sen. Sherrod Brown’s office said.
UPDATE: During congressional testimony on March 18, IRS Commissioner Charles Rettig testified: “We believe that we will be able to monitor and able to announce that individuals will not have to file amended returns to take the exclusion for the $10,200 per person. We hope to be able to announce that in the near future.”
But remember an important thing about this tax break. It’s only for unemployment income received last year; not for current unemployment income.
As it stands, unemployment checks received this year or later will be fully taxable. (Note: this is different from the stimulus checks, which are tax-free.)
State and local taxes on unemployment
Unemployment benefits are not subject to municipal income taxes in Ohio, so nothing changes there, the Regional Income Tax Agency confirmed.
But unemployment benefits are subject to Ohio income taxes.
Nothing is cast in stone yet, but the most likely scenario is that the $10,200 federal deduction will extend to Ohio.
This could come through legislative action in Columbus. But that won’t be necessary if the IRS revises the federal 1040 form to take that deduction before reaching the line on the form where the adjusted gross income is determined. This already is the case for some other deductions or credits.
The starting point for the state income tax form is your federal adjusted gross income.
Child tax credit
The expanded child tax credit as written into the law is for 2021. But since this is part of a stimulus bill designed to help cash-strapped families now and help the economy by triggering more spending, congressional leaders would like to get at least some of that money in the pockets of families as soon as possible.
Normally, the child tax credit is claimed at tax time. For 2020, it was $2,000 per child age 5 and under.
This bill expands that credit to $3,600 for children 5 and under, and to $3,000 for older child dependents.
The goal, Brown’s office said, is for at least part of this credit to be paid as early as July, as an advance on next year’s tax return.
Child credit beyond 2021?
Brown, the Ohio Democrat, favors making the expansion permanent. This is one area where there may be bipartisan support.
Republican Sen. Mitt Romney of Utah in February announced the framework of a plan to “provide greater financial security for American families by streamlining existing family policies to create one universal child benefit,” including replacement of the existing welfare program.
The math for Romney’s plan is a lot like the money involved in the stimulus-expanded child tax credit, but instead with payments going out monthly. The Romney plan amounts to $350 a month for each “young child” and $250 monthly for school-age children. That totals $4,200 a year for young children and $3,000 for others.
This plan would cut child poverty by up to one-third, according to details Romney’s office released.
Local income taxes
Remote workers who have been paying taxes to what used to be their regular work city, even while working at home in a another city or township because of the pandemic, might get a tax break if they continue to do so.
The provision in the year-old Ohio pandemic law that allowed this taxing authority to continue ends 30 days after Gov. Mike DeWine lifts the emergency he declared by executive order back on March 9, 2020.
DeWine has promised to lift health orders once cases drop to 50 per 100,000 people over a two-week period. It’s uncertain, however, whether the lifting of the heath orders would also include this emergency order.
But at some point, it will go away. When is unclear, because there are many things tied to the order that go beyond the widely publicized health-safety measures imposed by the administration.
Meanwhile, a fourth court case file filed Thursday questioning the legality of this part of the law, essentially arguing that it is not legal to tax people where they neither work nor live – pandemic or not.
If the suits are successful, it’s possible workers could receive rebates, though they may encounter new tax liabilities for where they live. RITA has a form to submit claims now, while the cases are pending. Cleveland’s Central Collection Agency does not have a form specifically addressing the COVID-19 work issue.
How about remote workers out of state?
The local income issue largely deals with people working at home. But what about state taxes if someone working remotely headed to Florida or Arizona to beat the winter for a few months?
They still owe Ohio taxes, because despite such temporary arrangements, they still are considered Ohio residents, the state tax department said.
“Long story short, there aren’t any special rules or state tax treatments for wages earned remotely during the pandemic,” the tax department said. “The wages are taxed using the same rules that have always existed.”
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