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March 8, 2021, 8:47 a.m. EST

Millions of Americans who were unemployed last year face another shock: A 2020 tax bill they can’t afford

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By Andrew Keshner

As Americans prepare to file their 2020 income taxes, a new Democrat-backed bill wants to block federal income taxes on the first $10,200 a person received in unemployment benefits last year.

As Capitol Hill negotiations swirl over President Joe Biden’s proposed $1.9-trillion dollar rescue package, one observer said there’s a real chance this proposal gets traction.

Unemployment insurance counts as taxable income and recipients need to withhold for income taxes in their application paperwork. Alternatively, they can either pay quarterly estimated taxes, or pay the amount owed when they file their income taxes.  

But many people aren’t aware the money from jobless benefits get lumped into a person’s taxable income, surveys suggest . Some 37% of people didn’t know unemployment benefits counted as taxable income, according to one poll released last summer by the tax-preparation chain Jackson Hewitt.

Indeed, just over half the survey participants didn’t know they had to request taxes be withheld. Jackson Hewitt conducted a separate 1,000-person survey on the topic in fall 2020. Of the participants who did receive unemployment benefits, 61% said they didn’t withhold for income taxes or earmark money from those benefits for taxes.

Some tax experts are worried about potentially millions of people  facing a bill they can’t afford.

The more the conversation targets people who are most in need, “the more likely this bill becomes law,” said Ed Mills, a Washington policy analyst at Raymond James.

In one part of Biden’s plan, he wants to bump the current supplemental federal payouts to $400 per week from $300 per week, and extend them through September.

The Internal Revenue Service can work out installment plans with taxpayers who can’t pay their full bill all at once.

In the CARES act, the federal government authorized $600 supplemental weekly jobless payments through July on top of the state payouts. Later in the year, then-President Donald Trump authorized supplemental $300 payments . At the tail-end of the year, Trump signed a rescue package green lighting $300 supplemental payouts through mid-March.

$10,200 is the same as 17 weeks of $600 supplemental unemployment, according to Michele Evermore, senior policy analyst at the National Employment Law Project. By her calculations, a worker last year may have averaged almost $24,000 in state and federal benefits.

Sen. Richard Durbin of Illinois and Rep. Cindy Axne of Iowa, both Democrats, introduced the Coronavirus Unemployment Benefits Tax Relief Act. The bill also waives federal income tax exposure on the jobless benefits a person receives from their state labor agency.

Lawmakers enhanced the jobless benefits in 2020 “because we knew an adequate and stable source of income would be vital for workers trying to make ends meet,” Axne said in a statement. The bill would “ensure that these workers don’t face an unexpected tax bill, which could put them into further economic peril this April.”

The 2009 stimulus act to counter the Great Recession also included income tax relief on $2,400 in unemployment insurance, Durbin and Axne noted.

Durbin, as a member of the Democratic leadership, gives some heft to the proposal, said Mills. But what could really be going for the idea is a growing focus on pinpointing aid to the people who are still financially hurting.

When it comes to Biden’s idea for a third wave of stimulus checks, new research suggests households above $78,000 would mostly save it instead of using the money in a rebounding economy.

“What we see is a strong desire to target the relief,” Mills said, “and there is a real concern that not enough has been focused on the bottom leg of the ‘K’ in terms of those suffering disproportionately. … Targeting tax relief to jobless benefit is a way of targeting relief.”

Mills is referring to the so-called “K-shaped recovery” where there’s a growing divide between economic well-being for richer households and poorer ones.

If the bill becomes law after people already start filing taxes, Mills said there are ways the government can get those tax benefits to people who may be entitled to relief but already pressed ‘send’ on their 2020 taxes.

“There are mechanics to be worked out, but someone should not hold off on taxes waiting for Congress to make changes to the current tax code,” he said.

Elisabeth Buchwald contributed to this report.

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