How the Pandemic Has Changed Your Taxes
New rules, many of them temporary, give taxpayers breaks that can cut their tax bills or even generate extra refunds this year.
By Tara Siegel Bernard and Ron Lieber
The pandemic year of 2020 was a doozy. Besides affecting the health, jobs, home lives and psyches of millions of Americans, the pandemic may also have consequences for your tax bill.
Three giant legislative packages extended different types of coronavirus-related relief, including two rounds of stimulus checks, expanded unemployment benefits and a series of tax breaks. The latest, a $1.9 trillion stimulus package signed into law on Thursday, will provide many people with yet another check.
Not surprisingly, taxpayers are confused: Can I qualify for a larger stimulus check? Would it be, um, wrong to pay myself the unspent money in my dependent care spending account because I did all of the caregiving while also working? (It feels right, but you probably know the legal answer to that one already.)
We highlighted some of the most significant changes below and tried to answer questions that are most likely to arise.
Are my unemployment benefits taxable?
Mostly. Unemployment insurance is generally subject to federal as well as state income tax, though there are exceptions (Nine states don’t impose their own income taxes, and another six exempt unemployment payments from taxation, according to the Tax Foundation). But you won’t owe so-called payroll taxes, which pay for Social Security and Medicare.
The new relief bill will make the first $10,200 of benefits tax-free if your income is less than $150,000. This applies to 2020 only. (If you’ve already filed your taxes, watch for Internal Revenue Service guidance.)
Unlike paychecks from an employer, taxes for unemployment aren’t automatically withheld. Recipients must opt in — and even when they do, federal taxes are withheld only at a flat rate of 10 percent of benefits. While the new tax break will provide a cushion, some people could still owe the I.R.S. or certain states money.
“We have lots of folks owing a little to federal or getting a small refund,” said Russell Garofalo, founder of the tax firm Brass Taxes, based in Brooklyn, “and who are owing $2,000 or more to New York and New York City.”
If states like New York don’t follow the federal changes, he added, taxpayers will owe money to states that tax unemployment.
Unemployment recipients should receive Form 1099-G, illustrating how much unemployment income they received and any taxes withheld, which should be used to fill out your tax return.
I didn’t collect unemployment income but I received a form that says I did.
You may be a victim of unemployment fraud, which was rampant last year. Reach out to your state agency and ask it to correct the 1099-G form, showing you didn’t collect anything, the Internal Revenue Service says. (Others may learn they were victims only after they file their taxes — because scam artists had the forms addressed to someplace other than their home.)
What about stimulus payments? Will they be taxed?
Nope. The so-called economic impact payments are not treated as income. In fact, they’re technically an advance on a tax credit, known as the Recovery Rebate Credit.
The payments could indirectly affect what you pay in state income taxes in a handful of states, where federal tax is deductible against state taxable income, as our colleague Ann Carrns wrote.
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