The Cares Act provided a $600 a week added benefit to the amounts available under state programs. For Arizona, that means the average person can get around $840 per week for up to 16 weeks. That’s over $13,000 and more than many folks are making, even at Arizona’s generous minimum wage of $12 per hour. The benefit was designed to cushion the impact of the pandemic layoffs, and to help keep people at home. Since the $21 per hour equivalent of unemployment is more than many people can make on their own, the Act did accomplish the ‘stay home’ part…well it did accomplish the don’t go back or look for work part. The stay home part didn’t quite take.
Another problem is lurking in the background here, the tax problem. Many people are unaware that unemployment benefits are taxable at the federal level (many states exclude – thankfully). They also don’t choose the voluntary withholding of 10% that is offered when they sign up. When tax filing time comes next year, some will have a rude surprise.
I see a number of working class families that count on that $1,200 to $2,000 annual refund to pay off debt or fund that major purchase – sometimes a car repair, sometimes a small vacation. These folks usually withhold that amount from their taxes as they go. For example, imagine a working couple who is lucky to be out of work for just the 16 weeks benefit provided under the act and then goes right back. This couple will find that they have $26,000 in income with no taxes withheld. At say a 12% marginal rate, they owe $3,120.
You guessed it, we go from getting $2,000 plus tax refund to owing over $1,000. I have seen it before and I constantly have to say, “Don’t shoot the messenger,” when preparing returns. Ugh.
I try to warn my clients, but next year’s taxes are pretty far from their minds at present. They can see the end of the 16 weeks coming. They can see COVID-19 cases spiking. Silly proposals for a vacation tax credit, don’t help ease their minds or help their current situation. Come on Martha! Talk about a let them eat cake proposal…Washington politicians could use 16 weeks unemployment and we will see how they like it.