The 2020 fiscal season is officially underway, and the millions of Americans who received unemployment benefits last year due to the coronavirus pandemic may be surprised.
This unemployment income is taxable, and if you did not have money set aside or withheld for these taxes, you could reduce your refund or even generate an invoice.
This may be particularly unexpected for self-employed contractors and the self-employed who are not normally eligible for state benefits, but who may have received unemployment assistance in pandemic cases under the CARES Act.
“This year there will be a lot of people who have unemployment insurance and who will not normally receive unemployment insurance benefits,” said Elaine Maag, senior research associate at the Urban-Brookings Center for Fiscal Policy. “So it’s going to be something new that they have to pay attention to.”
Differences in state and federal treatment
If you had any unemployment income last year, it is subject to taxes and must be reported on your 2020 income tax return. In January, those with unemployment income should have received a Form 1099 -G indicating the amount of money paid during the year.
Federal income taxes apply to these benefits, either for state unemployment insurance or for pandemic unemployment compensation paid under the CARES Act.
The problem is that withholding the proper amount of income tax is voluntary. You can opt for a fixed 10% of your benefits to be withheld to cover your tax liability.
To do so, you will need to file Form W-V4 with the state unemployment agency.
You can also choose to make estimated quarterly tax payments to the IRS.
Uncle Sam is not the only entity looking for a share of his unemployment income. Most states will also tax these benefits.
A handful of states: Alabama, California, Montana, New Jersey, Pennsylvania and Virginia: These payments are not taxed. Indiana and Wisconsin offer a partial exclusion of unemployment income, according to Andy Phillips, director of the H&R Block Tax Institute.
“Some states have withholdings and others require it to alleviate surprises when fiscal time comes,” said Jared Walczak, vice president of state projects at the Tax Foundation.
While it’s too late to offset the taxes you might owe by 2020, people who finish their returns earlier can at least plan to pay the amount they owe before April 15, the due date for the returns. of taxes and debts.
“You won’t have to make any payments until April 15, but it’s best to know in late January or early February that you’ll have to reach the dollar amount,” Phillips told the H&R Block Tax Institute .
Unemployment and tax credits
Families who received unemployment income during 2020 should also be aware of two key credits when filing their taxes: the earned income tax credit and the child credit.
Both credits add up to significant dollars: the income tax credit earned is worth up to $ 6,600 for a low-income household with three or more qualified children. And the repayable portion of the child tax credit is worth up to $ 1,400 per qualified child.
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The capture? Although unemployment benefits are taxable, they are not considered income earned.
Under normal circumstances, receiving unemployment would lead to a reduction in both credits when filing the tax return.
Lawmakers solved this problem in Covid’s year-end relief law. This year, when you file your 2020 taxes, you will have the option to use your 2019 income to calculate credit eligibility.
“If you went from being salaried to applying for unemployment, you may be affected,” Phillips said. “Using your 2019 earnings just to calculate the amount of credits can be a huge benefit to taxpayers.”