Individual tax filing due date: May 17, 2021 (adjusted from April 15, 2021)
Unemployment income: $10,200 per person not subject to federal tax (was taxable)
A surprise tax adjustment for tax year 2020 was passed into law in March of 2021 as part of the American Rescue Plan Act of 2021. This 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, 2021 to May 17, 2021. Furthermore, some or all of unemployment income received by millions of taxpayers in 2020 may now be tax free.
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 Act 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 significant tax savings on your 2020 return.
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 returns. To make matters worse, the IRS was granted no time to figure out how this tax break will be reported on 2020 tax returns. In addition, the American Recovery Plan Act requires the IRS to immediately send another round of economic recovery payments (stimulus checks) to millions of Americans.
The net result is an overwhelming of the Treasury Department and the IRS, both of which are already buried because of the pandemic and other programs passed into law due to emergency legislation.
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 have already filed your 2020 tax return: Wait for further instructions. Lawmakers are currently asking the IRS if it is possible to automatically make adjustments and issue a refund to those who have already filed their 2020 return. Issuing an automatic refund will avoid the need to file an amended tax return. There is no need to call the IRS. The best course is to wait for clarification.
- If you HAVE NOT filed your 2020 tax return: Filing your tax return may be delayed until guidance is received from the IRS and 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.
As with so many things during the COVID-19 pandemic, we will work through this adjustment. As always, we invite you to send any questions or concerns our way. We’re here to help.
Andrea L. Blackwelder, CFP®, ChFC, CDFA® and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with the Denver Financial Advisors at Wisdom Wealth Strategies.