Prepare Now for Upcoming Stealth Tax Hits
Nobody likes surprises, especially in the area of finances. So BILLSHARK wants to warn you now about two possible tax hits looming next year on those who can least afford it (naturally). While mega-corporations and the ultra-wealthy have armies of accountants to help them avoid taxes, the average American isn’t so lucky.
So you won’t be surprised to learn that two recent moves designed to help stimulate the economy and provide some financial relief during the pandemic will end up costing the very people they were designed to help.
Taxes on unemployment insurance
If you’ve never received unemployment compensation (UC) before, you may not know that this insurance program—a general fund paid into by employers, as well as by employees in some states—is subject to taxation.
This is the result of the Tax Reform Act of 1986, which made unemployment compensation fully subject to federal taxes.
The thinking behind this is apparently two-fold: 1) unemployment compensation is meant to replace wages you’d earn if you were working, so they should be taxable; and, 2) workers who receive a smaller UC benefit won’t be tempted to live off that versus looking for a job.
Not so fast
There are several problems with these arguments.
Why should a benefit your employer has paid into be considered taxable income? If you wrecked your car you wouldn’t owe taxes on any insurance benefits you received from the accident.
And if the jobs aren’t available, how are you supposed to go out and “find a job?” Since the beginning of the coronavirus pandemic, nearly 30 million Americans have filed for unemployment. While some of their jobs have returned, many have not, and hundreds of thousands of businesses have closed permanently.
Samantha Meyer, 29, told The Washington Post recently, “I’m not choosing to be in this position. I’m also not collecting that much in a week,” the former property manager added.
It took her four months to wade through the labyrinth of Wisconsin’s requirements to finally begin collecting the $288 a month (after taxes) she receives.
And as for “sitting around” living off that “generous” amount, she also noted that those receiving UC are required to prove they’re actively seeking work, even if there’s none to be had.
“I’d rather be working,” she told the paper. “Getting on unemployment is already such a circus. It’s still work to be unemployed. You still have to apply for jobs. You still have to file every week. I can’t imagine anyone willingly being on unemployment for an extended period of time. Not working has just been the most awful experience of my life.”
Unemployment benefits average about 40 percent of a person’s previous salary—much less if their salary was on the higher end, because all states cap unemployment benefits. The average is $307 a week, according to the Department of Labor.
Even with the $600 now-expired stimulus addition, most people’s UC has run out. The average length of time for UC is 26 weeks. Congress did not extend this period as it did under the Obama administration when jobs weren’t even as scarce as they are today.
Repayment of FICA relief
For those who were lucky enough to hold onto their jobs during the pandemic, President Trump unilaterally moved to delay their withholding on the FICA tax through the end of the year. This move on August 8 was touted as a tax “cut”. But in fact it’s a temporary loan that employees and their employers will have to pay back beginning the first of the year.
Trump’s memo directing employers to stop withholding the tax that funds Social Security has proved so cumbersome to implement that many employers simply ignored it. It applies to employees whose compensation during a biweekly pay period is less than $4,000. For many hourly employees, their compensation varies depending on hours worked. Figuring out how much to withhold on such employees was close to impossible, so their employers just didn’t bother.
The president, however, was able to force this arrangement on federal employees and the lower ranks of the military. This means those people, and others whose employers did implement the program, will owe these back payments next year.
What to do
If you didn’t opt to have your taxes withheld when you began receiving unemployment, start saving now, if at all possible.
And if you’re one of those whose FICA taxes were temporarily suspended, do not spend that money! Unless the new Congress changes the law in 2021, which experts consider unlikely, you will have to pay it back.
By the way, the $1,200 stimulus checks many people received won’t be taxable. So there’s a bit of good news.
Looking for extra cash? Let BILLSHARK find it for you. We’ve saved people hundreds on their phone, Internet and cable bills, and there’s no cost to let us try. So contact us today.