Receiving extra coronavirus unemployment benefits? How to avoid a big tax hit

Paying taxes on unemployment checks: Everything you need to know

Receiving extra coronavirus unemployment benefits? How to avoid a big tax hit
For the most up-to-date news and information about the coronavirus pandemic, visit the WHO website.

Unemployment numbers surged in 2020, topping out at 14.

7% in April, as the COVID-19 pandemic carved a path through the US economy, leaving millions of Americans work.

As the federal government and individual states grappled with a hodgepodge of responses, including a series of stimulus payments and the Paycheck Protection Program, it was unemployment insurance that provided a lifeline to many folks struggling to get by. 

Now playing: Watch this: Your tax questions answered in 3 minutes

And though expanded unemployment benefits may have been a boon to many in 2020, they may provide a surprise this year around tax time.

Un the stimulus checks, born from CARES Act in March and the December stimulus bill, which do not count as taxable income, unemployment payments are taxed and will need to be accounted for in your 2020 return.

We cover all of the details about unemployment benefits and taxation below — and we have a separate article covering common questions about stimulus checks and your taxes.

Do you have to pay taxes on unemployment?

Short answer: Yes. The IRS considers unemployment benefits “taxable income.” When filing for tax year 2020, your unemployment checks will be counted as income, taxed at your regular rate.

This applies both to standard unemployment benefits and the expanded benefits that were available to some during 2020.

Given that you're not required to have federal taxes withheld from your benefit payments, many people opt not to, electing to kick the tax impact down the road.

Do you have to pay state taxes on unemployment?

Maybe. If your state of residence collects income taxes, you may have to pay taxes on your benefits to both state and federal governments. That noted, there are a few states that waive unemployment income taxes. They are:

  • California
  • Montana
  • New Jersey
  • Pennsylvania
  • Virginia

Read more: Coronavirus hardship loans: What they are, how they work and how to get one

Did I already pay taxes on my unemployment?

If you received unemployment insurance this year, you'll receive a Form 1099-G, which shows how much money you received from unemployment benefits. It will also show whether or not — and how much — you elected to withhold. 

How to avoid a large tax bill

Whether or not to withhold depends on your financial situation. If you're barely getting by, it can be appealing to put off paying taxes in the hopes of being in a stronger financial situation later on.

That noted, it can be devastating to get hit with a big tax bill in the spring.

Your options include paying when you file your tax return, making estimated quarterly tax payments or having your taxes automatically withheld.

Many sole proprietors and freelancers make estimated quarterly tax payments, which lets you spread out what you owe into four annual payments. That noted, because these payments are your estimated total income, you could end up paying too much, resulting in a refund, or too little, which would require an extra payment come the April 15 deadline. 

You can elect to have your unemployment checks taxed a regular paycheck by filling out Form W-4V. The government will withhold the taxes due on each check, which both reduces your cash in hand — but also lessens the impact of a major tax bill coming all at once. 

Read more: How to estimate your 2021 tax refund: Tips, calculators and more

“,”author”:”Dori Zinn”,”date_published”:”2021-02-11T15:39:00.000Z”,”lead_image_url”:”https://www.cnet.com/a/img/EqNLprtOd1lHJ6pdF2pObkWWnvA=/1200×630/2019/12/19/8ed21098-725c-4683-ae6b-a64bc043a05e/gettyimages-1090495926.jpg”,”dek”:null,”next_page_url”:null,”url”:”https://www.cnet.com/personal-finance/paying-taxes-on-unemployment-checks/”,”domain”:”www.cnet.com”,”excerpt”:”You collected unemployment in 2020. Do you need to pay taxes on it?”,”word_count”:571,”direction”:”ltr”,”total_pages”:1,”rendered_pages”:1}

Источник: https://www.cnet.com/personal-finance/paying-taxes-on-unemployment-checks/

Collecting Unemployment Benefits Due to COVID-19? Prepare for a Hefty Tax Bill

Receiving extra coronavirus unemployment benefits? How to avoid a big tax hit

Millions of Americans have been hit hard financially due to the coronavirus pandemic. Approximately 36.5 million U.S. adults have filed for unemployment benefits over the past two months, according to the Department of Labor, and if the virus isn't contained soon, that number could continue to skyrocket.

Even with the help of unemployment benefits, however, many people are still struggling. To provide relief, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which provided millions of Americans with stimulus checks and also allowed unemployed workers to collect an additional $600 per week in unemployment benefits.

While stimulus checks are tax-free and won't count toward your income, unemployment benefits are a different story. If you're receiving benefits now, there's a good chance you could be hit with a hefty tax bill later.

Image source: Getty Images

How your unemployment benefits are taxed

Unemployment benefits have always been subject to federal taxes (and potentially state and local taxes, depending on where you live), but the additional $600 per week could result in a bigger tax bill.

The CARES Act was passed in late March, and it extends the $600 per week benefit boost through the end of July.

That means if you collect this extra money each week for the four months it's available, it will amount to nearly $10,000 in additional unemployment benefits.

That's a good chunk of change that can provide serious financial relief, but if you're not prepared to pay taxes on that extra benefit money, your tax bill could take you by surprise.

Exactly how much you'll pay in taxes on your benefits will depend on where you live.

Some states, including Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming, don't have state income taxes, so you may get a tax break on your unemployment benefits.

Other states, such as California and New Jersey, generally tax income but make an exception for unemployment benefits. To figure out whether you'll owe state taxes on your benefits, check your state's tax laws.

When it comes to how you want to pay these taxes, you have a few options. You can have the money withheld from each check, you could pay your taxes quarterly, or you can pay your entire tax bill when you file your tax return. There are advantages and disadvantages to each option, so consider each one carefully before you decide.

The best time to pay your taxes

If you're worried about owing a lot of money in taxes, you can opt to have your taxes withheld from each check. That way, you won't be slapped with a massive tax bill if you wait until you file your tax return to pay what you owe.

However, the downside to this approach is you won't have as much spending money right now. If you're trying to stretch every penny, it might be a better idea to hold off on paying taxes until your financial situation improves. You may need to make a bigger tax payment later, but you'll also have more money to pay your bills right now.

The middle ground between these two options, then, is to pay your taxes quarterly. This approach is a bit more complicated, because you'll need to estimate how much you'll owe in taxes each quarter — which may prove difficult if you don't know how long you'll be collecting unemployment benefits.

If you believe you'll be able to find a new job relatively soon, you may choose to simply wait until you file your tax return to pay your unemployment taxes.

But if you think you'll be collecting unemployment benefits for the foreseeable future, paying estimated taxes can help you avoid a big tax bill while keeping more money in your pocket for day-to-day expenses.

The coronavirus pandemic has cost millions of Americans their jobs, and unemployment benefits are a lifeline for those struggling to make ends meet. Just be sure you're prepared for the tax bill that will follow, so you're not caught off guard by this expense.

“,”author”:”Katie Brockman (TMFKatieBrockman)”,”date_published”:”2020-05-19T11:03:00.000Z”,”lead_image_url”:”https://g.foolcdn.com/editorial/images/574471/woman-finance-calculator-laptop-notebook.jpg”,”dek”:null,”next_page_url”:null,”url”:”https://www.fool.com/taxes/2020/05/19/collecting-unemployment-benefits-due-to-covid-19-p.aspx”,”domain”:”www.fool.com”,”excerpt”:”You could be in for a nasty tax surprise.”,”word_count”:670,”direction”:”ltr”,”total_pages”:1,”rendered_pages”:1}

Источник: https://www.fool.com/taxes/2020/05/19/collecting-unemployment-benefits-due-to-covid-19-p.aspx

Lost a job? How to pay taxes on unemployment benefits

Receiving extra coronavirus unemployment benefits? How to avoid a big tax hit

Lose a job in 2020? Get ready, you could be hit with a tax bill in 2021. 

Millions of people lost jobs and claimed unemployment compensation across the country last year as restaurants, retailers, theaters and other businesses faced massive cut backs hit during the coronavirus-induced recession.

And jobless benefits proved to be fairly generous, as the CARES Act offered an extra $600 a week in unemployment benefits beginning in April through July. As a result, some people nationwide may have received $1,000 or so a week in jobless benefits for four months. 

And yes, that $600 a week plus regular state unemployment benefits will be considered taxable income when you file your 2020 federal income tax return. 

“Unemployment benefits currently are fully included in taxable income,” said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. 

But un wages, he said, unemployment benefits are not subject to payroll taxes, such as Social Security and Medicare taxes.

More than 1 in 5 workers nationwide were work and seeking jobless benefits in the summer. Roughly 33.1 million workers were either on unemployment benefits, had been approved and were waiting for benefits, or had applied and were waiting to get approved, as of June 30, according to the U.S. Department of Labor. 

Michigan saw 2,361,468 people receive unemployment benefits in 2020, according to the state Unemployment Insurance Agency.

The tax season shocker for many jobless people will be that their tax refund could be far smaller than expected or they might even owe taxes. 

“Taxpayers may not be aware that unemployment is taxed,” said Lisa Greene-Lewis, a certified public accountant and tax expert for TurboTax.

How it all plays out will vary. It's possible, for example, that some families that have been hard hit financially will be eligible on their 2020 income tax return for income based tax benefits that they couldn't qualify for in 2019.

Greene-Lewis noted that generous tax benefits, such as the Child and Dependent Care Credit, might be available after incomes have fallen and offset some of the potential tax hit regarding jobless benefits.

Those who worked part of the year might be eligible for other tax benefits, too. 

“If someone was unemployed but also earned income as an employee or self-employed,” Greene-Lewis said, “they may now be eligible for the Earned Income Tax Credit worth up to $6,660 for a family with three kids when they may have not been eligible before.” 

Un during the recession a decade ago, taxpayers aren't getting a federal income tax break on their jobless benefits.

Years ago, the American Recovery and Reinvestment Act of 2009 offered a bit of a tax break to jobless people for unemployment compensation paid in 2009 only.

On 2009 federal returns, taxpayers were able to exclude up to $2,400 of unemployment compensation from federal taxable income.

Now, you're not as fortunate on the federal 1040. 

While jobless benefits are taxable at the federal level, tax polices vary when it comes to state income taxes. 

Luscombe noted that it's important to remember that many states, including Michigan, also tax unemployment benefits. Michigan has an income tax rate of 4.25%. 

Residents in six states — Alabama, California, Montana, New Jersey, Pennsylvania and Virginia — will not pay income taxes on jobless benefits even though those states have a state income tax. States that don't have an income tax, such as Florida, aren't taxing jobless benefits at the state level. 

More: Taxpayers report IRS stimulus payments being sent to wrong bank accounts

More: Unemployment benefits have been extended. So when will the checks come?

More: IRS says: Check back later on stimulus payments

Where's your 1099-G? 

When it comes to doing your income taxes, the first step involves keeping an eye out for Form 1099-G, Certain Government Payments, to show how much unemployment compensation was paid to you in 2020.

The State of Michigan Unemployment Insurance Agency is required to mail the 2020 1099-G form by Feb. 1.

Those who received unemployment benefits in 2020 face paying federal income taxes on those benefits when they file their 2020 income tax returns this year. File photo: On March 17, 2020, people wait in line for help with unemployment benefits at the One-Stop Career Center in Las Vegas. T (AP Photo/John Locher, File) (Photo: John Locher, AP)

But taxpayers can receive a 1099-G faster if they request an electronic version. You'd have until Jan. 9 to make that request in Michigan via your MiWAM account.

Under “Account Alerts,” you'd click “Please select a delivery preference for your 1099 Form.” 

The 1099-G form would be available to view online or download by mid-January.

Once you have the Form 1099-G, you need to see Box 1. You're going to need to claim payments of $10 or more in unemployment compensation, including Railroad Retirement Board payments for unemployment. 

“That is taxable and it goes on Schedule 1 of Form 1040, Line 7,” Luscombe said. 

Schedule 1 lists additional income and Line 7 is clearly marked “unemployment compensation.” 

Did you pay any taxes already? 

For some people, the good news is that they might have already withheld some taxes their unemployment benefits in 2020. If so, the pain might be far less when you file your income taxes this year. 

It's important that you look at Box 4 on the Form 1099-G. Here is where you'd find federal income taxes that you had withheld those jobless benefits. 

You'd report those withholdings on Line 25b of the 1040. 

More than 17,000 Michigan residents filed for unemployment benefits last week, a drop from the previous seven days but still a troubling sign heading into what is expected to be a tough winter for businesses. (Photo: STOCK IMAGE)

Some people, though, could be caught by another trap for failing to pay Uncle Sam enough money upfront during 2020.

Luscombe said it is possible that some people who received jobless benefits but did not withhold taxes could be hit with an “estimated tax penalty” on top of the regular income tax that they're going to owe. 

Some may have paid taxes in quarterly installments, which have due dates for the estimated tax payments on April 15, June 15, Sept. 15 and Jan. 15 of the following year (or the following business day if the due date falls on a weekend or holiday).

Some who received jobless benefits last year and didn't pay some taxes already may want to make an estimated payment, if necessary, by Jan. 15 this year. That's true especially if they're concerned that they'd owe more than $1,000 in federal income taxes on their 2020 return and could be hit by a penalty, Luscombe said. 

Withholding is voluntary. Federal law allows those receiving jobless benefits to choose to have a flat 10% withheld from their benefits to cover part or all of their tax liability. No other percentage or amount is allowed to be withheld to cover federal income taxes on jobless benefits. 

To do that, you need to fill out a W-4V form. 

Upset that you owe too much in taxes? And you're still work in 2021? You still can opt to have taxes withheld upcoming unemployment compensation. 

In Michigan, those receiving unemployment compensation are able to update their tax withholdings through their MiWAM account. They will need to go to Claimant Services, click on their active claim, then select Update Withholding, according to Lynda Robinson, a spokesperson for Michigan's Unemployment Insurance Agency.

Contact Susan Tompor via stompor@freepress.com. Follow her on @tompor. To subscribe, please go to freep.com/specialoffer. Read more on business and sign up for our business newsletter.

Read or Share this story: https://www.freep.com/story/money/personal-finance/susan-tompor/2021/01/07/get-ready-pay-taxes-unemployment-benefits/4133820001/

Источник: https://www.freep.com/story/money/personal-finance/susan-tompor/2021/01/07/get-ready-pay-taxes-unemployment-benefits/4133820001/

Taxes And Coronavirus Unemployment Benefits: 7 Steps To Avoid Surprise Tax Bills And Penalties

Receiving extra coronavirus unemployment benefits? How to avoid a big tax hit

The 2021 tax filing season was already destined to be un any other. Add in the fact that nearly a quarter of the labor force brought in income from unemployment benefits, and the picture gets even more complicated.

Un your $1,200 and $600 (or more) coronavirus stimulus checks, unemployment insurance (UI) is subject to federal and, in some cases, state income taxes.

That’s true for the entire alphabet soup of CARES Act-backed joblessness programs — Pandemic Unemployment Assistance (PUA), Federal Pandemic Unemployment Compensation (FPUC) and Pandemic Emergency Unemployment Compensation (PEUC) — and your state benefits.

Adding another layer of complexity, you may have been enrolled in a combination of all of those programs, depending on where you live, what you did for a living and when you lost your job.

And making matters worse, coronavirus-related job losses happened swiftly.

Many consumers, cash-strapped and fretting about making ends meet, were understandably hard-pressed to start claiming jobless benefits, often before they were even aware that they should be withholding taxes.

That oversight could negatively impact your bottom line. In the worst of cases, you could also open yourself up to extra penalties or fees. But rest assured: Tax preparation experts say there’s several steps you can take to help reduce the amount you owe or even waive those fines altogether.

“For so many people, this was their first time ever getting unemployment, and so there’s a lot that they straight up didn’t know,” says Kathy Pickering, chief tax officer at H&R Block.

“What we have seen right now is that, for the majority of people who are filing a tax return with unemployment income, they’re still getting a refund.

It may not be as big as they have seen in prior years, but they’re still getting a refund.”

Here’s seven steps you should take to prevent fines and fees from eating away at your 2020 tax return if you drew unemployment benefits last year or were unaware that you should be withholding income taxes.

1. Know the penalties you might be up against — and the exceptions

Just because you didn’t withhold taxes on your unemployment benefits doesn’t always mean you’re going to be subject to a penalty, but it’s important to at least be aware.

Generally speaking, if you still owe more than 10 percent of your tax liability by April 15, you could see a charge worth 0.5 percent of the tax owed after the due date, for each month or part of a month the tax remains unpaid, up to 25 percent, according to the IRS.

You would also be charged some interest on that penalty. Those costs change every three months but generally hold between 3-3.25 percent (the Fed’s federal funds rate plus a 3 percent margin).

There are some exceptions and safe harbors: If the balance that you owe is less than $1,000 (after subtracting your eligible withholdings and credits), you would be exempt from the penalty.

The IRS also exempts individuals from the failure to pay penalty if they covered 100 percent of the tax shown on the return for the prior year.

If you were working for part of 2020, as many Americans were before the coronavirus pandemic, you might’ve already managed to pay at least 90 percent of the taxes you owe for the year.

“If you didn’t have money withheld from your unemployment [benefits], that alone is not necessarily a problem,” Pickering says. “Really, what the IRS is looking at is, have you been paying taxes throughout the year?”

Your tax liability might have also fallen in the year that you were unemployed, helping to reduce the amount you’re expected to cover.

“Chances are, the unemployment you received even with the enhanced amount that was provided by the federal government isn’t going to equal or exceed what you ordinarily would receive in wages,” says Henry Grzes, lead manager for tax practice and ethics at the American Institute of CPAs. “You would obviously have a tax liability, but it may not be as great as you might’ve had with the wages themselves.”

2. Understand how your unemployment income is taxed compared to regular wages

When you opt in to have taxes withheld on your unemployment benefits, the IRS will most of the time do so at a flat 10 percent rate. That can be used to cover all or part of your tax liability for the year. The federal income tax rate that you’re charged, as always, depends on how much income you brought in during any given tax year overall.

Whether it’s wages, unemployment benefits or lottery winnings, “those are all treated the same,” Steber says. “They’re taxable, they go on your tax return and you pay taxes on them.”

Unemployment benefits, however, are not considered regular earnings and wages from the IRS’s perspective, meaning they’re exempt from the 12.4 percent Old Age, Survivors and Disability Insurance (OASDI) tax.

But those are just federal taxes. At the state level, it gets a bit trickier and how much your unemployment income is taxed depends on where you live.

For example, more than a dozen states — including New Jersey and California — do not place levies on your unemployment benefits. The rules are also changing all the time.

Maryland, for example, just passed coronavirus-specific legislation that offers jobless Americans relief from state and local taxes on their unemployment income. Be sure to research tax rates specific to your area.

3. Think about credits that can help lower your total

Tax credits are going to be your best ally if you forgot to set a withholding on your unemployment benefits. Every dollar that you’re eligible for in a credit goes toward subtracting from the income taxes that you owe.

Be sure to research all of the credits for which you’re eligible, the main ones being the Earned Income Tax Credit (EITC), the Child Tax Credit (CTC) and the Child and Dependent Care Tax Credit (CDCTC). You might not also be aware, but you can find certain tax savings depending on how much mortgage or student loan interest you pay in a year, as well as other credits for education-related expenses.

There’s a potential downfall: You might not be eligible for as high of a credit amount, given that some credit eligibility is earnings, not income. But pay attention to special changes Washington.

One such example: If you didn’t have enough earned income in 2020 to qualify for the EITC, you could use your 2019 tax return when you apply for the credit, potentially helping you get a better result.

Also making a big difference could be the Recovery Rebate Credit, a new tax opportunity specific to 2020 thanks to the first and second rounds of coronavirus stimulus checks.

Americans can apply for the credit if they didn’t receive any or all of the amount for which they were eligible.

For a family of four with child dependents, that credit could be as high as $5,800 if you never received any payment.

“Don’t let fear guide your decisions and if you really are stressed, which as so many people are right now, you can get the help to know you’re getting every dollar you deserve,” Pickering says.

4. Gather all relevant documents, and file as soon as possible

No one s to be in trouble with the tax collector — a sentiment so widely shared that The Beatles wrote a song about it.

But don’t delay filing your return just because you’re worried about getting hit with a penalty or owing a balance. The failure to file penalty can be 10 times more expensive than the failure to pay penalty.

Gathering all of your documents, preparing your return and filing as soon as possible can help you know exactly what you’re up against and what steps you need to take to cover your fees or bill before the deadline.

“It’s not that everyone who had unemployment and didn’t have withholding is going to get a penalty,” says Mark Steber, senior vice president and chief tax officer at Jackson Hewitt. “If you do owe, you need to know how much that is and how much trouble you might have raising that money.”

Similar to how you would’ve received a W-2 from your employer, you should receive what’s called a “1099-G” representing all of your unemployment income from both federal and state sources.

You could also receive multiple iterations of the form depending on how many unemployment programs you utilized.

You should be able to either find those documents online or in the mail, the latter of which should’ve been postmarked by Jan 31.

As always, be careful to report all of your earnings sources in the year, whether that be from regular wages at a business, a firm that you started in the year or even from gig work or self-employment.

“Any time you’ve got missing income on your tax return, you can expect to hear from the IRS in the form of a letter,” Pickering says.

“That could be something as simple as maybe you worked part time for a little while and forgot, or it was earlier in the year and you didn’t expect a W-2, or you thought you’d get a 1099-G in the mail, but you never saw it, so you went ahead and filed without it.”

5. If hit with a penalty, see whether you’re eligible for a waiver or certain exemptions

Even if you are hit with an underpayment penalty, there are certain ways to get around it.

For instance, the IRS says taxpayers won’t have to pay the penalty if they can show reasonable cause for the failure to pay on time.

Some examples of circumstances that qualify for a penalty waiver include a casualty, disaster or other unusual circumstance, according to the IRS.

Retiring after reaching age 62, becoming disabled in the current or prior tax year also qualifies you for the penalty waiver, as does having a reasonable cause for not making the payment or being able to demonstrate that the underpayment was not due to willful neglect, the IRS states.

Even though the law doesn’t state that coronavirus-related unemployment ignorance qualifies, it’s worth a shot to ask if it would save you a significant chunk of change. You’ll also need official documents such as court or hospital records to back up your claims.

You can file for a waiver by filling out Part II for Form 2210.

“It’s always best practice to ask for forgiveness because this was a strange year,” Steber says. “The IRS isn’t going to look to apply these provisions to get you a bigger refund, a bigger break or a tax exemption that you didn’t know you’d get but you qualify for. It’s incumbent upon you to look for all the rules and all the benefits and all the opportunities.”

6. Make sure you get your questions answered

If your tax situation is more complicated this year than in the past, you might want to consider consulting with a tax professional. Finding out about an obscure tax credit or getting help applying for a penalty waiver could be the difference between owing or receiving thousands of extra dollars on your return.

Even if you want to avoid paying a tax professional and prefer DIY taxes, you should still consider reaching out to an expert or Certified Public Accountant (CPA) if you encounter any odd questions here or there.

“There’s all kinds of help, and it’s important for everyone to know that, so you don’t get into a situation where you’re missing out on benefits you could be taking advantage of or freaking out and not filing because it’s too complicated,” Pickering says.

7. Don’t repeat the same mistakes

Almost a year into the coronavirus crisis, the number of Americans claiming and applying for unemployment benefits is still historically elevated.

If you’re still on unemployment benefits, now’s the time to make sure you’re withholding taxes, so you don’t confront the same problems down the road.

“Your return for 2020, that’s history. Right now, let’s talk about 2021 and what we can do in the next eight or nine months to improve your situation, so that you don’t owe $1,000 with this return next year,” Grzes says.

How to cover the payment if you do end up owing money to the IRS

You’re not entirely options if you’ve taken these steps and still owe money to the IRS. The sooner you file, the better. If you filed your taxes right now, you’d have almost two months to adjust your expenses and save enough cash to cover the cost.

“If someone has never been in the situation where they’ve owed money to the IRS before, it’s natural to have that panic reaction,” Pickering says. “What’s really important for people to do is first understand how much they owe and then realize that they’ve got time to work out that plan and they’ve got lots of options for how to make those payments.”

If you can’t possibly find a way to come up with the cash, the IRS offers payment plans. These tend to be more flexible for your financial situation and often allow you to dish out whatever cost you can afford upfront. You may also want to consider borrowing from a family member or friend before dipping into your retirement account or utilizing a credit card.

“It’s a risk to be sure, and a higher certainty if you had a lot of unemployment, which you could’ve done between the expansion of the state benefits or the federal programs that extended benefits,” Steber says. He adds that 3 4 taxpayers end up seeing a refund. “It may well be [that] you get a smaller refund, but the reality is, you don’t necessarily owe a penalty.”

Learn more:

Источник: https://www.bankrate.com/banking/federal-reserve/avoid-surprise-tax-penalties-fees-from-coronavirus-unemployment-benefits/

COVID-19 Unemployment Benefits and Your Taxes – TaxAct Blog

Receiving extra coronavirus unemployment benefits? How to avoid a big tax hit

The economic downturn of the coronavirus pandemic that struck back in March left millions of Americans without jobs.

Currently, more than 22 million people are collecting unemployment benefits — much of which is a direct result of the country shutdown.

And while the CARES Act offered some relief to those impacted by the economy closure through increased unemployment benefits, there is one big caveat to receiving those payments that many recipients may have overlooked.

The fact is unemployment compensation doesn’t come tax free. Anyone who receives it, must pay taxes on that money. That’s right. It’s taxable income – even if it doesn’t feel you “earned” it.

If you received unemployment benefits in 2020 – or any year – you must pay your share of taxes on that money. But if you find yourself sitting here, worrying that you haven’t done so yet – don’t fret. There’s still time to catch up before the end of the year.

There are a few different ways to do so. Let’s walk through the basics.

Unemployment benefits are taxable

The United States has a pay-as-you-go tax system, which means you must pay income tax as you earn income during the year.

And while it may feel unemployment benefits are not considered “earned income”, they actually are.

You do not have to pay Social Security and Medicare taxes on the money you do normal wages, but unemployment benefits are taxed by the federal government and possibly by your state depending on where you reside.

When you signed up for benefits, you may not have realized taxes could be withheld from your payments. Or maybe you opted to not withhold taxes and take home the full benefit amount instead.

Either way, it’s important to understand your current situation now so you aren’t surprised with a large tax bill or a significantly smaller refund when it comes time to file your return.

That’s because if you haven’t paid enough tax throughout the year, not only will you have to pay the amount you owe by the filing deadline, but you’ll also be subject to an underpayment penalty.

Time is still on your side

Thankfully, if you haven’t been paying (or saving) enough tax money to cover your unemployment income, there’s still enough time left in the year to make a plan and reduce any uncertainty.

First, take some time to evaluate your income from earlier in the year before you became unemployed. Analyze the tax money you withheld.

Was it enough to cover the income you earned at that time? Was it more than enough? If it calculates out to cover more than you technically earned at the time, you can use what you already paid in to cover a portion of the taxes owed on your unemployment benefits.

Use that information to create an action plan for the remainder of the year. How much money do you still have to cover the tax on? If you haven’t withheld enough to cover all of your unemployment benefits, you still have options to help minimize the impact that may have on your return next tax season.

Opt to withhold taxes from your benefits

It’s tempting to opt withholding tax on your unemployment benefits. But foregoing that option is an expensive choice. The tax bill racks up quick. Even if you haven’t done it yet, you can still elect to withhold your tax liability directly from your unemployment income.

Federal law allows you to have a flat 10% withheld from your benefits to cover your tax liability. Simply fill out Form W-4V, Voluntary Withholding Request, and send it to the agency paying your benefits. Before completing the form, however, check with the payor to see if they have their own withholding request form. Following their procedure will help expedite the request.

Proactively set aside 10%

If for some reason, you don’t want to have your taxes withheld directly from your benefits payments, you can always choose to save a chunk of money on your own to cover the responsibility.

For example, you could consider stashing 10% of your weekly benefit into a sinking fund, which is a savings account that’s separate from your emergency savings. Sinking funds are designed to be used to save for a specific expense. In this case, it’s your tax bill.

Having a separate fund allows you to know exactly how much money you’ve saved to specifically cover your tax bill and help to ensure you don’t tap it for other purchases.

Of course, you can simply save 10% of each payment in your regular savings account. But you have to be extra careful not to withdraw too much from that account for other expenses so that you don’t risk using up all the money you set aside to cover your tax liability.

Send in an estimated tax payment

If you don’t withhold taxes upfront, your other option is to submit an estimated tax payment. There are two different options for doing so. The first is to submit a payment using the IRS online payment portal.

The second option is to print Form 1099-ES and mail your payment to your regional IRS processing center.

Regardless of which option you choose, make sure to keep a receipt of when you sent the payment so you can report your estimated tax payment on your return.

If you have a TaxAct account, you can sign back in and the product will help you calculate your payment and complete the proper vouchers. Unfortunately, if you already filed your tax return, you can’t set up direct deposit payments. But as mentioned earlier, you can still set up a payment plan using the IRS portal. The IRS also has instructions to help you calculate your estimated payment.

Источник: https://blog.taxact.com/covid-19-unemployment-benefits-and-taxes/

NEWS
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: