Covid Unemployment is now taxable.
College students and teenagers who filed unemployment maybe taxed at the parents’ tax rate. Special rules for MA Unemployment.
W-2 Employee and Home Office deductions not allowed. Special rule for NH residents working in MA. And taxation for MA non-residents.
American Rescue Plan Day Care Credit. (Perks)
The American Rescue Plan Act of 2021 (ARPA) allowed an exclusion of unemployment compensation of up to $10200 for individual for tax year 2020 only. Keyword: 2020 only. That means, taxpayers that filed unemployment in 2021 have to pay taxes on it.
Why is this an issue? Teenagers and college students who filed unemployment last year might be taxed at their parents’ tax rate. For 2021, unemployment benefits are taxed at ordinary income. Because it is not earned income, unemployment compensation does not entitle a taxpayer to Earned Income Tax Credit, Child Tax Credit, or IRA/Roth Contributions. And, because it is not earned income, tax dependents of another are subject to Kiddie Tax Rules, form 8615.
MA Residents Only: If you are a MA resident and filed unemployment last year, chances are that you may or may not receive a 1099-G for 2021 from MA Department of Workforce and Development and the Division of Unemployment Assistance. Even if you did not receive the 1099-G, you should still report the unemployment proceeds. Not reporting the unemployment amounts could result in IRS inquiry and collection letters.
MA Self Employed who claimed unemployment in 2021: Many self employed in MA claimed unemployment benefits in 2021. MA DUA reviewed the benefits, issued audit notices in Spring of 2021 and were ordered to pay back benefits. Taxpayers with notices were allowed a request for a hearing, but many requests have not been scheduled yet. If the repayment of the unemployment was $3000 or less, you are not allowed to deduct it from your income. I know! It doesn’t make mathematical sense. The logic behind it is that unemployment is under Schedule A, miscellaneous itemized deduction subject to 2% of AGI limitation. All of those nice Schedule A itemized lined items went away due to Tax Cuts and Jobs Act for tax years 2018-2025. If you hate this, write a letter to congress. What’s really unfair, is that if you repaid more than $3000, the deduction or credit is allowed. To do this, the taxpayer has two options: Method 1: Deduct repaid income on Schedule A as misc. Itemized deduction not subject to 2% AGI limitation or Method 2: credit equal to tax paid in prior year.
If you haven’t noticed from 2021 already, W-2 employees working from the home cannot deduct home office expenses: To qualify for Form 2106 Employee Business Expenses, you must be a qualified employee: Armed Forces reservist, Qualified performing artist, Fee-basis state or local government official, Employee with impairment-related work expenses. Employer reimbursements, however, are tax-free. So if your employer reimburses you for a printer, you won’t have to pay taxes on the amount you received for the printer.
NH residents who commuted to MA for work in 2021: MA DOR won a US Supreme Court ruling against State of NH that allows the Commonwealth of MA to tax NH residents who previously commuted across state lines into MA. Employers will continue to withhold MA state tax. Prior to COVID, NH resident employees who worked in MA were allowed to excuse MA days of work when working from home. Any part of the day worked in MA is a full day worked in MA for purposes of allocating compensation. NH residents are required to keep a calendar of days worked.
Other MA nonresidents: If your worksite was relocated out of MA to your home state, you will still probably owe MA taxes on wages.
Just to wrap this blog on a good note, I’ll add some good news from the American Rescue Plan Day Care Credit.
A qualifying person for Dependent Day Care credit is:
A qualifying child under age 13 whom you can claim as a dependent.
Disabled spouse who isn’t physically or mentally able to take care for him or herself.
Any disabled person who wasn’t physically or mentally able to care for him or herself who you can claim as a dependent or could claim as a dependent except: the disabled person had gross income of $4300 or more, disabled person filed a joint return, or disabled person could be claimed as a dependent on another taxpayer’s 2020 return.
For 2021, Day Care Credit is refundable. The credit is now subject to phase down for filers with more than $400k of income. The credit range increased: It ranged from 35%-20% for incomes under $15k -$43k+. Now the credit is up to 35% for incomes under $150k and 20% credit is available to incomes of $400k. Day Care expenses amounts have increased for 2021: now the limits are $8000 for 1 dependent, and $16000 for two or more. Day Care Credit used to range from $600 for one, $1200 for two or more, now the range is $4000 for one, and $8000 for two or more. W-2 employees with day care benefits can smile this year as well. Previously the fringe benefit allowance was only $5000, this year, the limit is $10500. This amount can be found on Box 10 of the W-2.
2021 Tax updates from MASEA, December 9, 2021.
