The 2020 fiscal season is officially underway, and the millions of Americans who received unemployment benefits last year due to the coronavirus pandemic could have a surprise.
Unemployment income is taxable, and if you did not have the money allocated or withheld for these taxes, you could reduce your reimbursement or even go to an invoice.
This could be particularly unexpected for self-employed and self-employed people, who are not normally eligible for state benefits, but who could have received assistance for pandemic unemployment under the CARES Act.
“There will be a lot of people this year who have unemployment insurance and don’t normally receive unemployment insurance benefits,” said Elaine Maag, senior research associate at the Urban-Brookings Center for Fiscal Policy. “So there will be something new to look out for.”
Differences in state and federal treatment
If you had any unemployment income last year, it is taxable and must be reported on your 2020 tax return. In January, those with unemployment income should have received a Form 1099-G stating the amount paid during the year.
Federal income taxes apply to these benefits – whether it is state unemployment insurance or pandemic unemployment compensation paid under the CARES Act.
The problem is that withholding the appropriate amount of income tax is voluntary. You can choose to withhold 10% of your benefits to cover your tax debt.
To do this, you will need to submit the W-V4 form to the state agency that administers your unemployment.
You can also choose to make quarterly tax payments to the IRS.
Uncle Sam is not the only entity looking for some of your unemployment income. Most states will also tax these benefits.
A handful of states – Alabama, California, Montana, New Jersey, Pennsylvania and Virginia – don’t tax these payments. Indiana and Wisconsin offer a partial exclusion of unemployment income, according to Andy Phillips, director of the H&R Block Tax Institute.
“Some states are holding back, and others are calling for it to ease surprises when it comes time to tax,” said Jared Walczak, vice president of state projects at the Tax Foundation.
Although it is too late to waive the taxes you may owe for 2020, people who file their returns early can plan to at least pay the amount due by April 15 – the due date for tax returns and debts.
“You don’t have to make a payment until April 15, but it’s better to know in late January or early February that you have to come up with the dollar amount by then,” Phillips told the H&R Block Tax Institute.
Unemployment and tax credits
Families who received unemployment benefits in 2020 should also be looking for two key credits as they file their taxes: the earned income tax credit and the child tax credit.
Both loans amount to significant dollars – the earned income tax credit is worth up to $ 6,600 for a low-income household with three or more qualified children. And, the repayable part of the children’s tax credit is worth up to $ 1,400 per eligible child.
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Capture? Although unemployment benefits are taxable, they are not considered income.
Under normal circumstances, receiving unemployment would lead to a reduction in both credits when you file your tax return.
Parliamentarians addressed this issue in the Covid bailout at the end of the year. This year, when you file your taxes for 2020, you will have the option to use your 2019 income to calculate credit eligibility.
“If you went from being an employee to an unemployment claim, you could be affected,” Phillips said. “Using the revenue earned in 2019 just to determine the amount of credit can be a huge benefit to taxpayers.”