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Employment Tax Topics

How Unemployment Can Affect Your Tax Return

We know how difficult unemployment can be. Here’s what you need to know before filing your taxes this year.

Are you recently unemployed due to the coronavirus?

The COVID-19 pandemic caused many businesses to shut down, leaving millions of taxpayers out of work. If you were laid off and have not yet filed your 2019 taxes, you should file as soon as possible to get any refund waiting for you. The Coronavirus Aid, Relief, and Economic Security Act (CARES) was put in place to alleviate the economic fallout of COVID-19. If you applied for unemployment benefits, the CARES Act allows for 13 additional weeks of benefits until December 26, plus an extra $600 a week through July 31, along with the standard amount you will receive. 

How does unemployment affect my taxes? 

If you’ve received unemployment benefits, they are generally taxable. Most states do not withhold taxes from unemployment benefits voluntarily, but you can request they withhold taxes. Make sure you include the full amount of benefits received, and any withholdings, on your tax return.

Other factors you’ll need to consider: 

I am collecting unemployment – will that impact my income tax?

  • Unemployment benefits are taxable.

  • Total income is generally lower when you are collecting unemployment so you may qualify for the Earned Income Tax Credit (EITC) or a higher childcare credit, and you may even be eligible for the Additional Child Tax Credit. 

Will I owe taxes because of my unemployment compensation?

  • Generally, states don’t withhold taxes on unemployment benefits unless asked.

  • However, if you qualify for EITC, or the child tax credits, your taxes could be covered.

  • If you are still unemployed come 2021 tax time, you can set up a payment plan with the IRS or work out other delayed payment options. Beware: The IRS continues to assess penalties and interest on any unpaid amounts of taxes.

How do I deduct my job-hunting expenses?

  • Job-hunting expenses such as travel, cost of job placement companies, resume costs, etc. are no longer deductible.

  • Moving expenses are also no longer deductible unless you are active-duty military moving under military orders. 

Are government benefits taxable?

  • Check with your local benefits offices; you may be eligible for state and federal benefits due to the change in your income. Benefits such as SNAP, housing subsidies, childcare subsidies, and many others are generally not taxable. Gifts from various organizations, such as local food pantries and utility and gas programs are usually tax-exempt. 

Do I have to claim my severance pay on my tax return if I already paid taxes?

  • Severance pay is a lump-sum payment received from a company when you are terminated due to job closings, company reductions, or even company closures.  The money is based on time in service and job performance so it is taxable as wages.  The total you receive will have the usually Social Security and Medicare taxes withheld and will have taxes withheld and be included on your W-2. 

I lost my health insurance when I lost my job, do I have to pay a penalty?

  • The penalty for not having health insurance is $0 for all taxpayers.

Tax File Minute: Answers from a Tax Insider

Are unemployment benefits taxable?

Chief Tax Information Officer Mark Steber discusses what you need to know about unemployment benefits and taxes.

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