What you need to know
Individual tax filing due date: May 17, 2021 (was April 15, 2021)
Unemployment income: $10,200 per person not subject to federal tax (was taxable)
A surprise tax break for 2020 was passed into law in March of 2021. This late, late, late law change is creating havoc within the system. So much so that the individual tax filing due date AND payment of tax is delayed from April, 15 to May 17, 2021. Furthermore, unemployment income received by millions of taxpayers in 2020 may now be tax free! Here is what you need to know.
Background
Unemployment compensation was received by millions of Americans during the pandemic. While it’s welcome income during a tough time if you’ve lost your job, it’s classified as taxable income to be reported on your tax return.
The recently passed American Rescue Plan now makes part of your unemployment benefits free from federal taxation. Specifically, the first $10,200 of 2020 unemployment compensation or as much as $20,400 if your spouse also received unemployment is now tax free. The benefit is for households with adjusted gross income under $150,000. Depending on your tax bracket, this tax break could mean $1,200 or more in taxes saved on your 2020 return.
The problem
The legislation which contains this tax break didn’t become law until March of 2021, three months after the end of the tax year and after millions of Americans already filed their 2020 tax return! And to make matters worse, the IRS has no time to figure out how this tax break will be reported on your 2020 tax return. And Congress also passed legislation that requires the IRS to send millions more economic recovery payments PLUS develop a system to be in place immediately to send monthly enhanced child tax credit payments to families starting in July!
The net result is an overwhelming of the Treasury Department and the IRS, who are already buried because of the pandemic and other prior programs passed into law.
The result
Tax filing delay. You now have until May 17, 2021 to file your 2020 individual tax return and pay the tax. This move from the traditional April 15 filing deadline DOES NOT impact first quarter estimated tax payments or extended filing due dates in September and October 2021.
Tax-free unemployment income. If you received unemployment compensation in 2020, here’s what you need to know:
- If you’ve already filed your 2020 tax return: Wait for further instructions. Lawmakers are currently asking the IRS if it’s possible to automatically make adjustments and issue a refund if you’ve already filed your 2020 return. Issuing an automatic refund will avoid the need to file an amended tax return. So there is no need to call, we can only wait for clarification.
- If you HAVE NOT filed your 2020 tax return: Filing your tax return will be delayed until guidance is received from the IRS and it is deployed into tax filing software. The IRS is changing one of its schedules and then providing the information to software companies. Once this guidance is received, delayed tax filings can proceed. In the meantime, DO NOT delay turning in your tax information as returns can still be prepared and be ready to be filed once IRS guidance is received.
While this legislation is creating chaos in preparing tax returns, rest assured every effort will be made to get your tax return filed as soon as possible. So, if you have not already done so, please continue to send in your information so your return can be filed as soon as is possible.
