What do you do (and not do) if you already owe 2018 or 2019 income taxes, or taxes from earlier years, and haven’t sent in the latest tax returns? What if you owe 2020 income taxes even though the IRS is not taxing $10,200 of unemployment income that year? That was our topic last week. The first $10,200 of unemployment is not being taxed because of last month’s American Rescue Plan Act. This week’s topic covers your options if you owe income taxes for prior tax years. Even if you don’t owe for 2020, or owe less, that may not help much if you were already behind.

If You HAVEN’T Submitted Recent Tax Returns

For tens of millions of Americans, the last year has been the most financially disruptive in their lifetimes. Many lives were turned upside down around a year ago. If that includes you it’s understandable that you had trouble preparing and sending in your 2019 income tax returns.

The IRS recognized this to some extent by extending its tax return deadline from April 15 to July 15, 2020. So did virtually all states with income taxes (which include 41 out of the 50 states). But if your financial challenges went beyond last July, you may still not have made that deadline. Indeed you may not have submitted them even now if you owe and cannot pay.  That may be especially true if you were already a year or more behind on taxes at that point.

Do you owe 2020 income taxes even though the IRS is now not taxing the first $10,200 of unemployment income? What to do and not to do.

Last week we discussed the extent to which unemployment income is not taxed because of the American Rescue Plan Act. Generally, you don’t pay federal (and possibly state) income tax on the first $10,200 in benefits you received in 2020. Section 9042(a) of the Act. (See our last blog post about qualifying for this, and other details.)

Let’s get into two significant practical problems you may still have in spite of this substantial benefit:

If you are among the one in four Americans who received unemployment benefits during the pandemic, the IRS is not taxing the first $10,200 of it. 

Unemployment Benefits Are Generally Taxable

As the IRS states plainly, “[i]f you received unemployment compensation during the year, you must include it in gross income.” Unemployment Compensation, IRS Topic No. 418. Furthermore, “unemployment compensation” explicitly includes not just the usual “state unemployment insurance benefits.” It also includes “Federal Pandemic Unemployment Compensation provided under the . . . CARES Act of 2020.” Unemployment Compensation.

Bankruptcy timing can affect not only whether you must pay a tax debt but also whether you must pay certain tax interest and penalties.

This blog post is in a series about the importance of smart timing of your bankruptcy filing. Today we cover how good bankruptcy timing can prevent you having to pay certain income tax interest and penalties.

Usually you can discharge income taxes (write them off forever) by waiting long enough to file bankruptcy. Here’s how it works with Chapter 13.

Our blog post of three weeks ago introduced the importance of timing your bankruptcy filing right. We gave a list of 15 examples where timing can make a huge difference. Two weeks we covered the first one, timing bankruptcy to cover as many debts as possible. Last week was about discharging/writing off income taxes, specifically under a Chapter 7 “straight bankruptcy.” This week is about doing so under Chapter 13 “adjustment of debts.”