By Ed Brennen
Perhaps you are among the roughly 40 million Americans who received unemployment benefits last year during the COVID-19 pandemic. If you filed your 2020 tax return as soon as the Internal Revenue Service began accepting them on Feb. 12, you paid the tax due on your unemployment money, as required by law, and figured that was the end of it.
But a month later, you learned that the rules had changed. Under the new $1.9 trillion American Rescue Plan Act of 2021 signed into law by President Biden in early March, as much as $10,200 of unemployment benefits received in 2020 suddenly became exempt from tax for households whose incomes were less than $150,000.
That’s just one of the ways the pandemic has complicated this year’s tax season, according to Clint Carney ’08, a certified public accountant and adjunct accounting
professor in the Manning School of Business
“Everything is fluid — that’s how it usually is with tax — but it just seems the impact on Americans is much greater during COVID,” says Carney, who is chief financial officer at Semcasting, a data analytics and marketing company based in North Andover, Massachusetts. He has taught accounting courses in the Manning School since 2014.
Recognizing these complications, the IRS recently extended the filing deadline by a month to May 17 — a move that Carney calls a “short-term Band-Aid” as the IRS scrambles to adjust to changing tax laws while also sending out federal stimulus checks to millions of Americans. Massachusetts has followed suit and extended the deadline for filing state taxes to May 17.
“Nobody feels sorry for the IRS, but they are in a tough spot when it comes to processing taxes this year, for sure.”
-Accounting Adjunct Prof. Clint Carney
“How much more can the IRS or the states get caught up in 30 days? It’s probably going to be a while before everything is back to normal,” he says. “Nobody feels sorry for the IRS, but they are in a tough spot when it comes to processing taxes this year, for sure.”
Regarding the change to unemployment benefits, the IRS has said that those who have already filed their taxes this year should not amend their returns; the IRS will automatically adjust them based on the unemployment compensation exclusion. But 35 states, including Massachusetts, also tax unemployment benefits, and Carney says it’s unclear if they will adopt the federal exclusion.
Another source of confusion this year, Carney says, is federal stimulus payments.
“A lot of people wonder if that’s something you claim on your return. The answer is ‘no.’ It’s not taxable income to you. It’s essentially a free payment from the government,” says Carney, who adds that the stimulus money also does not affect your tax bracket. “It has no tax impact on you whatsoever.”
While millions of people have been forced to work remotely from home during the pandemic, Carney notes that unless you are self-employed, you can’t write off home office expenses.
Employees who live in one state and work in another — such as the 84,000 New Hampshire residents who commute to jobs in Massachusetts — normally pay income tax in their state of employment. But the work-from-home scenario has complicated matters, Carney says. Massachusetts, for instance, has said that it can still withhold income taxes on employees who are working from home in New Hampshire. Lawmakers from the Granite State disagree and have taken their case to the
“Now they’re butting heads in court trying to figure this out. It’s just a disaster,” Carney says.
Identity theft and fraud are concerns every tax season. Carney says the problem will be compounded this year by the widespread unemployment scams that cost Americans an estimated $36 billion last year.
“I’m scared to think about how many taxpayers are going to get a notice from the IRS once they file their tax returns saying, ‘Hey, you didn’t include your unemployment,’ even if they were employed,” he says. “That’s going to open a whole can of worms.”
Carney’s advice if you do get such a letter from the IRS?
“First, make sure it’s valid. The IRS basically only sends letters — they never call and they definitely don’t email,” he says. “And don’t panic if you do get a letter from the IRS. Always just respond. Be very up front. Send them letters, and have tracking on those letters so you can prove they were sent and received by the IRS. Make sure you’re documenting all the communications that you have with them.”
With so much in flux this year, Carney says he empathizes with those who aren’t well-versed in tax law or don’t have the means to pay an expert.
The good news for the average taxpayer is that time is still on their side.
“You’ve got an extra 30 days, and who knows if that will change?” he says. “And as long as you don’t think you’re going to owe taxes, you can file an extension and get even more time.”