Stefani Reynolds / Bloomberg via Getty Images
The IRS this week started issuing an additional 1.5 million tax refunds to people who received unemployment benefits in 2020. That’s on top of the nearly $ 9 million worth of refunds the agency has sent out since May.
Funds delivered this week by direct deposit went into bank accounts on Wednesday, and paper checks were sent out starting Friday. The average refund is $ 1,686.
But those who received a refund and continued to receive unemployment benefits in 2021 shouldn’t expect a similar cut in their federal taxes in the next filing season, according to financial experts.
Unemployment benefits are generally treated as taxable income, but federal lawmakers waived taxation on part of the benefits received in 2020 after the Covid-19 pandemic resulted in unprecedented numbers of people taking up the unemployment system.
More from Personal Finance:
What you should know about applying for federal rent allowance
Delays in unemployment benefits persist, over a year in the pandemic
Another wave of students could drop out of college this fall
The economic situation is such that the legislature may not feel compelled to offer the same tax aid in the next year. According to the Department of Labor, more than 13 million Americans were receiving benefits in mid-July.
“That rule came in a year when we had record unemployment,” Janet Holtzblatt, a senior fellow at the Urban-Brookings Tax Policy Center, told CNBC. “Fortunately, the economy has improved, which really reduces the likelihood of an extension.”
The American bailout plan, which President Joe Biden signed in March, excluded up to $ 10,200 per person of unemployment benefits collected in 2020 from federal income tax. (Only those with income less than $ 150,000 were eligible.) Some states followed suit with their own tax breaks.
However, these tax exemptions came after millions of people filed their annual tax returns. The IRS will now refund any tax overpayments that may have been incurred.
Since then, the agency has paid over 8.7 million unemployment benefits. The funds spent this week represent the fourth round of payments. The IRS will continue to review and adjust tax returns in this category this summer.
The Century Foundation estimates that approximately 40 million people received unemployment benefits over the past year. Some would have received a larger or surprising tax bill for 2020 without the partial federal tax relief.
This is because states that administer unemployment benefits are supposed to offer recipients the option to withhold 10% of benefits to cover part or all of their tax liability. But money-strapped unemployed workers, many of whom are new to the unemployment system, may not have chosen reluctance.
Last year, for the first time in their lives, so many people were unemployed.
Senior Fellow at the Urban-Brookings Tax Policy Center
Some states also did not offer workers an option on certain pandemic-era unemployment programs, according to The Century Foundation.
As a result, less than 40% of unemployment benefits were withheld in taxes last year, the group predicts.
“Last year, for the first time in their lives, so many people were unemployed,” said Holtzblatt. “You were really caught by this big surprise at the end of the year.”
There are steps those in receipt of unemployment benefits can take to prepare for a potentially hefty bill during the early 2022 tax season.
For one, recipients should choose to withhold the 10% tax if they can afford it, Andrew Stettner, a senior fellow of the Century Foundation, told CNBC.
You can fill out Form W-4V, Voluntary Withholding Request, and according to the IRS, give it to the government agency that pays the benefits.
“If you can’t afford it, at least remember that when you go back to work you’ll have to save up for it,” said Stettner.
However, depending on income and other factors, even a 10% withholding tax rate may not be high enough to fully cover the tax.
Recipients who have not deducted tax from benefits or who believe they have underpaid can choose to make quarterly estimated tax payments, according to the IRS.
Families who started getting upfront child tax credit payments in July – up to $ 300 per month per child – can also set aside some of those funds, he said.
“I don’t think it’s a done deal,” said Stettner in order not to have any further tax breaks. “People should always prepare for the worst case scenario rather than the best case.”