- Dealing With Your Clients’ Unemployment Income’s Taxes
Dealing With Your Clients’ Unemployment Income’s Taxes
The global pandemic has brought a lot of changes, and most of them are devastating. One of them is that unemployment rates in the US have significantly risen in 2020 due to COVID-19. Still, there is light at the end of the tunnel because many people have received unemployment compensation for the first time in 2020. Now, the question many have is if it’s taxable. So, Is it?
The Answer is…
Yes, unemployment compensation is taxable at a federal level, and most likely at the state level, if the total income is more than the minimum required to file. Keep in mind: taxable benefits for 2020 include unemployment compensation under the CARES Act or the second stimulus package bill.
What Did the American Rescue Plan Do?
Based on the American Rescue Plan, the first $10,200 of unemployment income for individuals who make less than $150,000 per year will not be taxable on the 2021 return. If your client is married, each of them is entitled to this for a combined total of $20,400. On the other hand, if you make over $150,000 or more, you won’t be able to take the exclusion.
But, What If Your Client Already Filed for the 2021 Tax Return and Didn’t Take the Exclusion?
Let the IRS take care of it! This is because if this is the case, the IRS will refigure the taxes at the start of spring. There’s likely no need to file an amended return for clients to take the exclusion. In the case that your client overpaid, your client will receive an additional refund, or the overpaid amount will be applied to what they owed. With this, the IRS will directly send the additional refund to your clients, which will start in May 2021. There will be two phases of recalculations—first, the IRS will work on single and married taxpayers who qualified for the $10,200 exclusion, and second, they will sort out the returns for taxpayers who filed married, filing jointly and eligible for the $20,400 exclusion.
What If the Client Now Qualifies for an Additional Tax Credit?
In this case, you will need to file an amendment for your client. On the other hand, if the client already claimed the credit but needs to adjust the amount based on the exclusion, the IRS will take care of this and calculate it. However, if your client didn’t claim the deduction and is now qualified, they should file an amendment to claim the tax break.
How Can You Help Your Client Reduce What They Own on Their Unemployment?
The first thing would be to help your client check their withholding on their unemployment compensation. Next, let them withhold income taxes as they would normally do with their regular income. In that case, your client must fill out Form W-4V, Voluntary Withholding, and they can withhold up to 10%.
Dealing with unemployment income tax is confusing to people who are not well-versed in taxes. That’s why you should know how to work on this to ensure you deliver the necessary help to your clients. Better yet, utilize tools and apps that can assist you in dealing with tax-related work. Make your job easier with the best professional tax software
from Keystone Tax Solutions. Get a free demo today!