Protecting Your Credit When You’re Unemployed
While unemployment benefits can help you cover basic necessities, they won’t necessarily be enough to cover all your bills. While being unemployed doesn’t impact your credit directly, it can indirectly hurt your credit if you fall behind on bills.
Many creditors recognize that you could be unemployed because of circumstances outside your control, and may work with you to temporarily waive or lower your payments. These hardship options can make it easier to manage your bills, and working with the company rather than skipping a payment without an explanation can help protect your credit.
Unemployment Compensation Thats Taxable
The Coronavirus Aid, Relief and Economic Security Act was passed on , and it provided for legislation that would beef up benefits for the unemployed. The Act provided unemployed Americans with an additional $600 a week in unemployment compensation. Then additional legislation passed in December provided for an additional $300 a week through .
The CARES Act created the Pandemic Unemployment Assistance program to extend unemployment eligibility to individuals who wouldnt otherwise have qualified for assistance, namely the self-employed. The Pandemic Emergency Unemployment Compensation program gave taxpayers an additional 13 weeks of benefits.
All this income is normally taxable, and taxation isnt limited to these extra federal provisions. Regular unemployment compensation provided by states from the Federal Unemployment Trust Fund or from their own programs, railroad unemployment benefits, and disability benefits paid in lieu of unemployment compensation are all considered taxable income, too. This is the case every year, regardless of a pandemic.
Benefits are only subject to income tax, however. You dont have to pay FICA taxes on it Social Security and Medicare.
Are There Tax Breaks For Unemployment
The Earned Income Tax Credit is one tax benefit that many people may overlook. It is intended to help taxpayers with low to moderate income. The amount of credit you can receive depends on your filing status, total income, and how many qualifying children you have.
If you are paying for childcare while you look for work, you could receive a tax credit to offset those costs. The amount you can claim for the Child and Dependent Care Credit depends on your income.
For the EITC and the childcare credit, you must have earned income to report on your return. Your unemployment compensation does not count toward these since it is not earned. But if you lost your job during the year, you can still qualify based on what you earned while you were still employed.
If you have dependents under age 17, you may be able to claim the Child Tax Credit. You do not need to have earned income to qualify for this credit, but your dependents will have to meet certain requirements to be eligible. If you claim anyone over the age of 17, they may qualify for a separate dependent credit worth $500.
Have you picked up a side gig, like driving for Uber, tutoring, or selling a product as an independent consultant? If so, you may be considered self-employed for tax purposes. To learn more, read: Different Types of Self-Employment.
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Preparing Your Tax Return Now
If you are preparing you own tax return, you must determine if you are eligible for the exclusion by considering whether your AGI is less than $150,000. Filing electronically is the easiest way to calculate the correct amount. The IRS has worked with the tax return preparation software industry to reflect these updates so people who choose to file electronically simply need to respond to the related questions when electronically preparing their tax returns. See New Exclusion of up to $10,200 of Unemployment Compensation for for information and examples. For others, instructions and an updated worksheet about the exclusion were available in March and posted to IRS.gov/form1040. These instructions can assist taxpayers who have not yet filed to prepare returns correctly.
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The COVID-19 pandemic has disrupted many parts of our lives. But there’s one annual ritual you still can’t escape: paying your taxes.
For millions of Californians, this year’s tax return will include a less common form of income — unemployment benefits.
Taxes can be confusing even in the best of times. And only more so if you spent last year in-and-out of work, collecting income from multiple sources, including California’s unemployment agency.
We’ve put some common questions about unemployment benefits to tax experts in Los Angeles. Hopefully these answers will make filing a bit easier after a tough year.
Wait… I have to pay taxes on my unemployment benefits?
Yes, unemployment benefits are taxable. This can understandably come as a shock to those who find the whole unemployment system confusing. But unemployment checks are considered income, and you’ll have to report that money when you file.
But there’s good news if you live in California. Of all the states that levy a state income tax, only a handful exclude unemployment benefits, and California is one of them. However, federal income tax still applies.
How much you owe will depend on how much income you collected last year — from unemployment, W2 employment, freelancing, investments, etc. — and what tax bracket you fall under based on that income.
Do I have any withholdings?
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You May Owe Federal State And Local Taxes
Generally, all taxpayers are liable for federal income taxes on unemployment income. That type of income includes funds received under programs like Federal Pandemic Unemployment Compensation and Pandemic Unemployment Assistance .
Whether you have to pay state or local income taxes depends on where you live.
Some states dont tax income at all, so youre in the clear in Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. New Hampshire and Tennessee also give you a break here because they only tax investment income.
And six other states dont tax unemployment benefits even though they have a state income tax: Alabama, California, Montana, New Jersey, Pennsylvania, and Virginia.
Indiana and Wisconsin may only tax a portion of your unemployment benefits.
Youll also need to check the rules in your area. Some cities and counties have local income taxes that apply to unemployment compensation.
Despite Federal Exemption On Unemployment Benefits Some Jobless Might Owe Taxes To Irs And Ny
As we have been reporting the IRS is allowing folks on unemployment to keep the first $10,000 without paying taxes. However, the State of New York is not so generous you have to pay taxes on every dollar of your jobless benefits and more.
When the government passed the American Rescue Plan back in March, Congress approved an exemption on the first $10,200 of unemployment benefits retroactive to January of 2020.
For couples filing jointly, the exemption is $20,400. But the State of New York is forgiving nothing, which can be tough for folks that have already filed their taxes.
Tim Eliason of EG Tax Service says it gets worse. Even for those who had taxes withheld from their unemployment checks, it was not enough.
The federal income tax was under-withheld, but the exemption would erase most of that. However, New Yorks withholding on unemployment is 2.5%, while the actual income tax owed would be 4%.
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What To Do If You Have Filed Already
If you collected unemployment insurance in 2020 but you already filed your tax return, you are still eligible for the exemption under the American Rescue Plan. You do not need to take any action to claim the money youre owed. Instead, the IRS will automatically refund the money.
The first round of payments will begin in May and continue over the summer, according to the IRS. Youll either receive a refund or the amount will be deducted from your taxes owed.
There is no need for taxpayers to file an amended return unless the calculations make the taxpayer newly eligible for additional federal credits and deductions not already included on the original tax return, the agency noted in a recent release.
This includes, for example, taxpayers who claimed the Earned Income Tax Credit but are eligible for an increased credit under the new exemption. While youll automatically get a refund for the exemption, youll need to file an amended return to get a larger credit.
Unemployment Federal Tax Break
The latest COVID-19 relief bill , gives a federal tax break on unemployment benefits. This means that you dont have to pay federal tax on the first $10,200 of your unemployment benefits if your adjusted gross income is less than $150,000 in 2020. The $150,000 income limit is the same whether you are filing single or married.
For paper filers, the IRS published instructions on how to claim the unemployment tax break: New Exclusion of up to $10,200 of Unemployment Compensation. For online filers, the IRS has stated that tax software companies have updated their systems to reflect the unemployment federal tax break. If you file your taxes online and havent filed for 2020 yet, you may want to make sure your tax software is updated before filing your tax return.
If you filed your 2020 tax return before this new law change, the IRS is asking you not to file an amended return and not to take any additional steps. The IRS will automatically issue refunds starting in May and into the summer to those who qualify. If you claimed tax credits such as the Earned Income Tax Credit and Child Tax Credit , the IRS will also automatically issue refunds if you qualify for a higher amount because the tax break changed your income level.
If your state decides to give you a state tax break and you already filed your state return, you should check to see if you are newly eligible for any state tax credits.
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If You Simply Cant Pay
Ideally, you already knew all this and took steps to pay as you were battling your way through the nightmare of being unemployed. But alls not lost if you find yourself faced with a nasty, unexpected tax bill when you prepare your tax return in 2022. You were collecting unemployment compensation for a reason, so you might not have a healthy savings account to fall back on.
Contact the IRS and ask about an installment payment program. You can also apply on the IRS website. The agency provides a few payment options when taxpayers simply cant afford to pay in a timely manner. Youll have to pay interest, but it will be less than if you simply didnt pay, and any financial penalties might be forgiven. The worst thing you can do is ignore the dilemma. The IRS will work with you if you have no other reasonable options.
Be sure to at least file your 2021 tax return on time, even if you cant come up with the money right away. The financial penalties for failure to file are worse than the penalties for failure to pay.
Irs Will Recalculate Taxes On 2020 Unemployment Benefits And Start Issuing Refunds In May
COVID Tax Tip 2021-46, April 8, 2021
Normally, any unemployment compensation someone receives is taxable. However, a recent law change allows some recipients to not pay tax on some 2020 unemployment compensation.
The IRS will automatically refund money to eligible people who filed their tax return reporting unemployment compensation before the recent changes made by the American Rescue Plan. These refunds are expected to begin in May and continue into the summer.
Under the new law, taxpayers who earned less than $150,000 in modified adjusted gross income can exclude some unemployment compensation from their income. This means they don’t have to pay tax on some of it. People who are married filing jointly can exclude up to $20,400 up to $10,200 for each spouse who received unemployment compensation. All other eligible taxpayers can exclude up to $10,200 from their income.
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Rep Higgins Proposes Expansion Of Historic Tax Credits
Even on the federal, for a lot of people, if it had not been for the forgiveness, they were probably going to be behind. Because most people fall in the 12 percent tax bracket. So they were going to fall behind on that, too, but the forgiveness made up for the shortfall, said Eliason.
But what may seem hard to believe about the federal exemption on unemployment benefits is most unemployment recipients wont have to file an amended return to get their refunds. The IRS will correct the returns for them on top of all the other unfinished work the tax people still have to do.
They have not finished 2019 processing of returns for everybody that had paper. They have done two stimulus, they are processing 2020 returns. Now they are doing another stimulus, and yet, too, on their plate is amending everybodys return that had unemployment, added Eliason.
IRS officials say they should be issuing the refunds on unemployment checks starting this month.The first refunds would go to individual tax filers with couples refunds going out in June or July and folks with complex tax returns later in the year.
Quarterly Estimated Tax Payments
You also have the option of making estimated tax payments to the IRS, sending in more than the allowed 10 percent instead of having the state withhold taxes on your behalf. You can make payments on the IRS Direct Pay website just note on the drop-down menu that youre making an estimated tax payment and indicate the year for which youre paying. You can also print out vouchers provided on Form 1040-ES and send them in with paper checks.
And, of course, you can have extra sums withheld from your paychecks if you should return to work before the end of the tax year in question. The important thing is that you get your tax payments to the IRS as early as possible because late payment penalties and added interest can apply to tax debts that linger.
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How Much Should You Withhold From Unemployment Benefits
Individuals receiving unemployment benefits should include the benefits as part of their gross income. The taxes owed on benefits are due when individuals file their next income tax return. Most people who receive unemployment benefits are in a difficult financial position and need money to survive. However, not accounting for taxes on unemployment benefits could lead to more financial struggles and a large tax payment later.
Many experts recommend that individuals submit a request for federal and state tax authorities to withhold taxes on unemployment benefits. Individuals can file a Form W-4V, which is also called a Voluntary Withholding Request. A federal tax rate of 10 percent can be withheld from each payment of unemployment benefits. The advantage of paying taxes upfront is that you avoid paying a big lump-sum amount at the end.
Another option is to make estimated tax payments quarterly on unemployment benefits. You can calculate the amount you owe or get an estimate from an accountant. However, you will have to pay a penalty if your estimate was lower than what you actually owe. In contrast, you will receive a tax refund if you paid more than what you owe. Form 1099-G, which is also called Certain Government Payments, reflects total unemployment benefits and the tax withheld on the benefits.
Note On Special Benefits
The EI repayment requirement only applies to regular benefits, including regular fishing benefits.
It does not affect special benefits such as those for:
- Parents of critically ill children
If you receive only special benefits, you do not have to worry about repaying benefits if your net income surpasses the threshold. Similarly, special benefits received in the previous decade do not trigger the repayment requirement.
If you receive both special benefits and regular EI benefits in the same year, you may be required to repay a portion of your regular benefits.
For example, if you received both unemployment and maternity benefits in 2019, your net income for that year was over $66,375 and you received regular EI benefits in one of the 10 previous years, you would be required to repay a portion of your benefits. However, you would only be required to repay regular benefits rather than special maternity benefits.
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I Received Unemployment Benefits In 2020 How Are They Taxed
Unemployment benefits are subject to federal taxes, but the American Rescue Plan created new thresholds for whats taxable in this case.
If your modified adjusted gross income is less than $150,000, for singles or married people filing separately, you dont have to pay taxes on the first $10,200 of 2020 unemployment benefits you earned. For married people filing jointly, if each spouse received unemployment, this exemption applies to the first $10,200 worth of benefits for both individuals. If your modified AGI is $150,000 or more, this exemption does not apply to you. And the threshold stays the same for all statuses it will not double to $300, 000 if you are married and filing a joint return, for example.
If you file a Form 1040-NR , the IRS says your spouse isnt eligible for the tax break on the first $10,200 worth of benefits.
According to the Employment Development Department , Pandemic Additional Compensation that extra $600 federal benefit bump people got from March until late July, and the extra $300 federal benefit bump people started getting in late December is taxable and must be included in your gross income. However, dont confuse this money with one-off stimulus checks from the U.S. government , which are not taxable. Read more about pandemic federal benefits if you’re claiming unemployment in California.