The clock is ticking on a new unemployment tax benefit

When the $1.9 trillion COVID relief bill was signed into law by President Joe Biden this past week, the clock officially started on a tax benefit that many Americans may sorely need. But the logistics involved with claiming it will create challenges for tax professionals.

The law, which earmarks billions of dollars of relief for Americans in the form of a third round of stimulus payments, as well as aid for various industries and institutions, includes an important benefit for taxpayers who lost their job at some point in 2020. For those with less than $150,000 in adjusted gross income who collected unemployment benefits this past year, the COVID relief bill allows them to receive up to $10,200 of those benefits tax-free.

Taking advantage of that benefit will require a fair amount of explanation and, in many cases, some extra groundwork chasing down early filers and amending their returns when the IRS gives the green light.

First, there is the issue of awareness. Most Americans are unaware that unemployment benefits are taxable at all. That’s partially due to lack of experience, but also to the fact that tax withholding on unemployment benefits does not happen automatically. Taxpayers need to file Form W-4V with the agency paying the benefits to have taxes withheld on their unemployment, and most do not do that.

Instead, many taxpayers find this out as an unpleasant surprise at filing time, something a great many Americans who lost their job at some point during the pandemic discovered earlier this tax season. The new bill changed that, creating a potentially sizable benefit for the 2020 tax filing season.

So, what’s the problem? Many of these taxpayers have already filed their 2020 returns.

Americans who knew they would qualify for a third round of stimulus payments were eager to file, especially if they knew their 2020 return would make them eligible for more stimulus than they would receive if the calculation was based on their 2019 return. Plus, those that were expecting tax refunds were looking to expedite that process as quickly as possible. What do they do now?

Right now, that’s not entirely clear. Last week, the IRS advised Americans that they should not file an amended return, which would show their unemployment benefits and make that portion of their income tax-free. The IRS says guidance is coming soon, but has yet to issue any.

So what does that mean for the tax pro inundated with work ahead of the filing deadline?

No one needs a reminder on how stressful a normal tax filing season is for preparers, and this year has already come with a fair share of complications. Now add in extra ambiguity around these taxpayers who have already filed, and it could be just enough to push some small shops or independent accountants to the brink.

Still, when the IRS does issue that guidance, a second wave of work is something that all tax pros will need to be ready to handle right away. It may not be in the form of amended returns, but there will likely be something to do. It stands to reason that there will be plenty of demand among taxpayers ready to take advantage as soon as possible. For tax pros, the ability to anticipate that extra workload and start taking steps now to get out in front of the last-minute crush will be critical.