UNEMPLOYMENT INCOME DILEMMA AND SBA ISSUES GUIDANCE FOR VICTIMS OF IDENTITY THEFT RELATED TO DISASTER LOANS

What are the issues that receipients of unemployment income face when filing their 2020 income tax returns?

There are two issues that I have seen relating to recipients of unemployment income in 2020. They are the following:

The first issue is individuals received far greater amounts of unemployment than in past years. This was based on the additional $600 or $300 per week provided by Pandemic Unemployment Assistance (PUA). Receiving more money is certainly a good thing, however, unemployment income is considered to be taxable income. I’m not even going to get into my feeling on taxing unemployment (if individuals are in need why are we taxing them on the assistance?). Well maybe I’m going to get into a little bit. The increased amount of unemployment is blindsiding individuals with balances due.

While it is true these individuals had the option to withhold Federal income tax, most either withheld nothing or, at most, 10%. I recently completed a return for an individual that had $22,000 in W-2 wages and $38,000 in unemployment income. This income moved the individual into the 22% tax bracket and created a significant balance due. Withholding was taken out, but not enough.

The second issue concerns unemployment income received by dependents. I have a situation where a college student had $500 of W-2 earnings and collected $14,000 of unemployment income. The problem in this scenario is that while the standard deduction of a single individual is $12,400, this does not hold true for dependents. Children that can be claimed as a dependent (whether or not they are actually claimed) are limited on their standard deduction to the greater of $1,100 or their earned income plus $350. The student in my scenario was limited to an $1,100 standard deduction and therefore owed tax on almost all of the unemployment income.

To make matters even worse because the student is a dependent and the unemployment is considered unearned income, the student is subject to the Kiddie tax. Without getting too detailed, the kiddie tax was designed to stop wealthy parents from shifting assets to their kids in order to lower the income tax bite. Let’s take an example where the parents are in the 37% tax bracket and earn $10,000 of interest income on assets worth $300,000. The parents would pay tax of $3,700 plus there is an investment tax of 3.8% on married individuals filing jointly with Adjusted Gross Income (AGI) exceeding $250,000. This adds another $380 of tax bringing the parents’ total to $4,080. If a child were in the 10% bracket, by moving the assets to the child the tax would be $1,000. The savings is $3,080. This example excludes the standard deduction which would lower the child’s income tax even further.

The kiddie tax combats this exact scenario by requiring the dependent child to pay income tax on the unearned income at the parents income tax rate.

Since unemployment income is considered unearned income, my college student client owes tax of almost $2,800 after completing the kiddie tax schedule. While the computation is complex, you understand the concept. I am leaving aside the potential gift tax issues this scenario would also cause.

SBA ISSUES GUIDANCE FOR VICTIMS OF IDENTITY THEFT RELATED TO DISASTER LOANS

There are taxpayers receiving loan statements from lending institutions showing balances owed based on Disaster Loans they did not receive. The Paycheck Protection Program (PPP) is an example of a disaster loan. Identity theft is not limited to PPP loans. Keep in mind that while all PPP loans are Disaster Loans, not all Disaster Loans are PPP loans. PPP is a disaster loan with a provision that if certain conditions are met becomes a forgivable loan, meaning all or part of the loan may not have to be paid back. I mention PPP because it has been in the news so often during the last 10 months that most people are familiar with the term.

The letter issued by the SBA explains the procedure for solving this situation.

The SBA will require the following items to commence solving your problem. These documents are:

A copy of an Identity Theft Report filed with the Federal Trade Commission (FTC) at IdentityTheft.gov or filed with another federal law enforcement agency or your local police department.

A copy of your photo identification issued by a Federal or state agency. Examples are a Driver’s License, state ID card, U.S. Passport, or military ID.

A completed and signed Declaration of Identity Theft

Send all three above documents by email to IDTheftRecords@sba.gov, or you can fax your documents to (202) 481-5200, or mail them to:

U.S. Small Business Administration

Processing and Disbursement Center

Attn: ID Theft Records

14925 Kingsport Road

Fort Worth, TX 76155

The letter also states that the SBA’s review is only to release you from your debt obligation to the SBA. They will not update you on any possible criminal investigation.

A copy o the SBA letter is attached to this email.

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Hang in there and stay safe,

Jeff Skolnick, CPA, M.S. Taxation