If you’re like a lot of New Mexicans, you may be in a radically different tax situation now than you were in heading into 2020.
This year has brought an unprecedented number of layoffs, furloughs and other job changes, and many of us found ourselves relying on unemployment and other government programs when we may not have been expecting to.
While those programs have proven to be lifelines for many, they do come with a catch: Some of the benefits from these programs are taxable, and it could leave many New Mexicans facing a tax payment they weren’t expecting.
“I’m just concerned that this is going to raise its ugly head and become a problem for people come tax time in the spring,” said Dorothy Wood, state administrative specialist for the AARP Foundation’s Tax-Aide Program.
The COVID-19 pandemic and restrictions put in place to contain it have wrought havoc on unemployment systems in New Mexico and across the country.
In response to a nationwide spike in unemployment due to the COVID-19 pandemic, the federal government rolled out a slate of new unemployment programs, including the Pandemic Unemployment Compensation program, which provided an additional $600 per week to unemployment recipients earlier this year, and Pandemic Unemployment Assistance, which provided benefits to people who don’t typically qualify for unemployment.
Earlier this year, as many as 156,000 New Mexicans were receiving state or federal unemployment benefits, the vast majority of whom were employed in 2019.
Because of all the new state and federal programs that have popped up in response to the pandemic, and because a lot of the people receiving unemployment haven’t done so in the past, Wood said she’s worried that people will be surprised by the nuances of some programs.
“It’s very possible we’ll get some people who are blindsided,” Wood said.
Gene Varela, state coordinator for the Tax-Aide program, didn’t provide specifics on how much New Mexicans enrolled in various programs could owe come tax season. But he said even programs that don’t provide benefits may end up costing New Mexicans who aren’t paying attention.
Varela cited the Earned Income Tax Credit – a federal program that offers a tax credit to low- and moderate-income workers – as a program that could cost newly unemployed people. To qualify for the program, Varela said people have to be working. If they aren’t working, they may end up not receiving a tax credit that they’ve grown accustomed to.
“It’s going to be a different season for taxpayers,” Varela said.
With that in mind, the Internal Revenue Service is reminding people receiving unemployment that they can opt to have tax withheld from their benefits now to help avoid owing taxes on their income when they file next year. Those looking to do so may fill out a Voluntary Withholding Request form and send it to the agency paying the benefits, according to the IRS.
Taxable benefits include any of the unemployment programs under the federal CARES Act. However, IRS regional spokesman David Tucker said the one-time federal $1,200 stimulus payment distributed earlier in the year will not be taxable.
Tucker said additional information on the tax status of various state programs, including New Mexico’s recently approved one-time $1,200 unemployment payment, will be available early next year.
Stephen Hamway covers economic development, health care and tourism for the Journal. He can be reached at shamway@abqjournal.com.
