Unemployment and your taxes can be a confusing combination. Due to the pandemic, many more people received unemployment benefits. Here are some of the most important things you need to know before you file your taxes this year.
COVID-19 affected many businesses and for some, it meant they had to shut down. This left literally millions of taxpayers unemployed. The CARES (Coronavirus Aid, Relief, and Economic Security Act) was enacted to alleviate the economic fallout due to the pandemic. For those who filed for unemployment benefits, the CARES Act allowed 13 extra weeks of benefits up until December 26. There is also an extra $600 per week available through July in addition to the standard amount received. Additionally, many states provided extra weekly unemployment funds for unemployed individuals who meet certain qualifications.
Question One: Will unemployment affect my taxes?
In general, unemployment benefits are considered taxable income. Most states don’t automatically withhold taxes from unemployment, but you can request that they do so. Check with your state about how to voluntarily withhold taxes from your unemployment benefits. That will help you cover income taxes when you do file this year’s tax return. Make sure to include the total amount of benefits you received as well as any withholdings on tax returns. Here are some key factors you need to know about unemployment benefits and your income taxes:
- Unemployment benefits are taxable income.
- Unemployment is not classified as “earned” income toward the EITC (Earned Income Tax Credit), childcare credit, or the Additional Child Tax Credit.
Question Two: If I get unemployment compensation, will I owe taxes?
Remember that unless you request it, most states won’t withhold taxes on unemployment benefits. However, if you otherwise qualify for EITC or child tax credits, your taxes on unemployment should be covered. One way to determine if you owe or not is to do a year-end tax checkup. If you don’t have your taxes covered, you may be able to make some adjustments.
What if you find yourself still unemployed after filing taxes? You may consider setting up a payment plan or working out other delayed payment options with the IRS. If you owe a balance, you may be charged interest daily. The IRS offers some tax penalty forgiveness options for you to explore. If you qualify for one of them, it may help reduce interest and lower your tax bill. Even if you do not have the money to pay, file your return on time. The penalties for filing your taxes late, or much higher than the penalties assessed for paying late.
Question Three: Can I deduct job-hunting expenses?
Job-hunting expenses like travel, the cost of hiring a placement company, and resume costs are no longer deductible. Unless you are active-duty military moving due to direct military orders, your moving expenses are not deductible either.
Question Four: Does the IRS consider benefits taxable?
If you experience a change in your income, your local benefits office can inform you of any eligibility when it comes to state and federal benefits. Most benefits like SNAP (formerly food stamps), housing subsidies, childcare benefits, and other forms of assistance are not typically taxable. Other places to get help including local food pantries, gas and utility programs, and gifts from organizations are usually tax-exempt.
Question Five: If I paid taxes on my severance pay, do I have to claim it on my tax return?
Severance pay is a lump-sum payment a company gives when they terminate employees due to company reductions or closures. The payment is usually based on the employee’s tenure with the company and their performance. The IRS considers these payments to be taxable income. Severance pay usually accounts for Medicare, Social Security, state and federal taxes. You’ll see this noted on your W-2.
Question Six: If I lost my health insurance when I become unemployed will I have to pay a penalty?
The federal government doesn’t impose a penalty on taxpayers for not having health insurance. Some states do penalize individuals for not having health insurance if they don’t meet an exemption.