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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. The Coronavirus Aid, Relief, and Economic Security Act (CARES) was enacted 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. In addition, many states have additional weekly unemployment funds available for qualified unemployed individuals.
How does unemployment affect my taxes?
Unemployment benefits are generally taxable. Most states do not withhold taxes from unemployment benefits voluntarily, but you can request they withhold taxes. If you are receiving unemployment benefits, check with your state about voluntary withholding to help cover your income taxes when you file your tax return. 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.
- Unemployment compensation is not considered “earned” income for the Earned Income Tax Credit (EITC), childcare credit, and the Additional Child Tax Credit calculations and can reduce the amount of credits you may have traditionally received.
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.
- You can do a year-end tax checkup to see if you have enough credits and withholding to cover your taxes. You may still have time to make adjustments to lower your shortfall.
- 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.
- The IRS assesses penalties on the balance owed when you file and when you pay late they also compound interest on the full bill daily. The IRS has programs that may forgive your tax penalties. If you qualify, this will also help reduce your interest and lower your overall tax bill.
- Make sure you file your tax return on-time, even if you can’t pay. In the short-term, the penalties for filing late are higher than the penalties for paying late.
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. These payments are typically based on time in service and/or job performance, and as such are taxable as wages. This payment will have the usually Social Security, Medicare, federal and state taxes withheld, which will be reflected 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 on the federal return for all taxpayers.
- Certain states do penalize taxpayers who don’t have health insurance coverage and don’t meet an exemption.
Are unemployment benefits taxable?
Chief Tax Information Officer Mark Steber discusses what you need to know about unemployment benefits and taxes.