You May Need To Adjust Your Spouses Income Tax Withholding
One way you can increase your current after-tax income, if you and your spouse were both working, is to have your spouse adjust his or her income tax withholding.
If your spouses withholding is based on the assumption you both earned an income, he or she is almost certainly having too much withheld for your current circumstances.
The working spouse should file a new Form W-4 with his or her employer to adjust the amount of income tax withheld.
Other Retirement Payments Impact On Unemployment Compensation
Income that is drawn from a qualified retirement plan, annuity, or IRA can reduce your unemployment compensation in many states. If you are taking distributions from your 401 plan or receive a pension every month, this amount may be used to offset your unemployment benefits.
Youâll need to contact your stateâs unemployment office to find out what the rules are for where you live. In some states, your unemployment benefits may be reduced if you have a pension or retirement income. In other states, such as California, retirement income is exempted.
It should also be noted that IRA contributions cannot be made from unemployment benefits, because it is not considered to be earned income by the IRS.
Guide To Unemployment And Taxes
The IRS considers unemployment compensation to be taxable incomewhich you must report on your federal tax return. State unemployment divisions issue an IRS Form 1099-G to each individual who receives unemployment benefits during the year.
If you received unemployment benefits this year, you can expect to receive a Form 1099-G Certain Government Payments that lists the total amount of compensation you received. The IRS considers unemployment compensation to be taxable incomewhich you must report on your federal tax return. Some states also count unemployment benefits as taxable income.
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What If I Can’t Pay The Tax Owed On Unemployment
Paying taxes on unemployment insurance payments can seem counterintuitive, since most recipients either are out of work or recently have been. This could lead to a situation where you have a tax bill that you can’t afford to pay.
In such a case, it’s important that you still file a return. If you’re unable to pay the tax you owe by your original filing due date, the balance is subject to interest and a monthly late payment penalty. There’s also a penalty for failure to file a tax return. So try to file on time, whether or not you can afford to pay the full balance due.
If your tax bill is too much for you to pay right now, pay as much as you can to reduce the amount of interest that will accrue. You can also apply to pay the balance in installments, allowing you to make monthly payments. You can request an installment agreement online through the IRS website, by filling out Form 9465, or for help.
Unemployment Benefits Impact On Social Security & Vice Versa
As mentioned previously, the state of Minnesota is the only state in the union that currently offsets the unemployment benefits of those who are already receiving Social Security income. If you live in this state, your unemployment benefits may be reduced by an amount equal to half of your Social Security benefits.
But, collecting unemployment benefits never has any type of impact on the amount of Social Security you receive. If you take Social Security at age 62 and are still working, then your earned income can reduce your Social Security benefit, but because unemployment benefits are considered to be unearned income, there is no impact.
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State Income Taxes On Unemployment Compensation
You may also need to pay state income taxes on your unemployment benefits. This is another tricky area because each state has different rules. Some states dont have a state-level income tax, and others dont tax unemployment benefits. Some tax unemployment benefits in full, and others impose taxes on only a portion of benefits.
If you live in one of the eight states that doesnt have a state income tax , you dont have to worry about paying state income taxes on your benefits. New Hampshire residents are also in the clear because the state only taxes interest and dividend income.
California, New Jersey, Pennsylvania, and Virginia dont tax unemployment benefits, so residents in those states dont have to worry about state-level withholding, either.
If you live in one of the other 37 states or the District of Columbia, check with your tax advisor or your states tax agency to find out how unemployment benefits are taxed. Those states should allow you to set up state withholding online when you apply for unemployment or at any point while you are receiving benefits.
Get Advice If You Need It
Being unemployed can be upsetting or even scary. There have been so many changes to taxes and relief in response to Coronavirus and it will continue to evolve as the year goes on. Its confusing and hard to stay on top of all the information. But you dont need to do it alone.
Jones Tax is here to help. We can help you figure out exactly how to budget for these changes and what benefits you will likely qualify for based on your situation. We can help assure that you are paying enough income taxes on your unemployment now to avoid penalties in the future. If you have any questions or need any help with your taxes, give us a call at 327-8409 today to talk to Tyler Jones or send us a question online for a no-obligation consultation.
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Register With Itax Portal
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Type and you be directed to the KRA portal where you will enter your KRA Pin or USER ID. Enter and log in with your iTax password. If you have forgotten your password, retrieve one using FORGOT PASSWORD option on the bottom right of the iTax portal page.
Will I Owe Taxes On Stimulus Checks
No, stimulus checks aren’t considered income by the IRS. They are prepaid tax credits for your 2020 tax return, authorized by two relief bills passed last year that aimed at stabilizing the struggling U.S. economy in the wake of the pandemic. Because the stimulus payments arent considered income by the tax agency, it wont impact your refund by increasing your adjusted gross income or putting you in a higher tax bracket, for instance.
When it comes to getting paperwork ready, you’ll want to dig up the IRS Notice 1444 for the stimulus payment amount you were issued in 2020. And the second round of payments would be outlined in Notice 1444-B.
Jessica Menton and Aimee Picchi
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$10200 In Unemployment Benefits Won’t Be Taxed Leading To Confusion Amid Tax
The $1.9 trillion American Rescue Plan signed into law last week includes a welcome tax break for unemployed workers. The law waives federal income taxes on up to $10,200 in unemployment insurance benefits for people who earn under $150,000 a year, potentially saving workers thousands of dollars. States that currently tax unemployment benefits have yet to decide whether they will allow those state taxes to be waived as well.
The change is good news for many taxpayers, who could save as much as $25 billion, according to the Wall Street Journal. But it also affects an already complex tax season for a tax collection agency that is already behind thanks to understaffing and pandemic-fueled disruptions.
$10200 Unemployment Tax Break
The American Rescue Plan waives federal tax on up to $10,200 of unemployment benefits collected last year.
The tax benefit applies per person meaning a married couple can exclude a maximum $20,400 from income tax.
However, taxpayers can’t get the break if their modified adjusted gross income is $150,000 or more. The limit is the same regardless of filing status like single or married.
More from Personal Finance:Some $1,400 stimulus checks went to people who didn’t need them
The $150,000 limit would disqualify each spouse in a higher-earning couple who both lost their jobs in 2020 and typically file a joint tax return from getting the tax break.
Such couples, who likely fall in the 22% or 24% federal tax bracket, could be losing out on $4,500 to $5,000 in tax savings.
But filing separate returns could put each spouse under the $150,000 income limit and make each eligible.
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Earned Income Tax Credit
The earned income tax credit, or EITC, is a federal income tax credit for working people with low to moderate income. If you earned money through wages or self-employment work before losing your job, you might qualify for this credit in the tax year in which you had eligible income.
But unemployment benefits dont count as earned income for the purpose of the EITC, so if you didnt have any earned income in the tax year, you wont be able to claim this credit. Eligibility also depends on other factors, including your filing status, the number of qualifying children you can claim, and the amount of your earned income.
The credit is refundable, meaning that, in addition to reducing the amount you owe, it could give you a refund over the amount of tax you paid in.
How To Prepare For Your 2021 Tax Bill
You have the option of having income tax withheld from your unemployment benefits so you dont have to pay it all at once when you file your tax returnbut it wont happen automatically. You must complete and submit Form W-4V to the authority thats paying your benefits. Withheld amounts appear in box 4 of your Form 1099-G.
Federal law limits the amount you can have withheld from benefits to 10%. This may not be enough to adequately cover taxes on the benefits you received. If youve returned to work, you can opt to have extra tax withheld from your paychecks through the end of the year to help cover taxes owed on your unemployment benefits as well as your regular pay.
Your other option is to make advance estimated quarterly payments of any tax you think you might owe on your benefits. You have until Jan. 15, to make estimated tax payments on any benefits you receive between September and December the prior tax year. In fact, you must do so if sufficient tax wasnt withheld from your unemployment benefit payments. You could be charged a tax penalty if you dont pay as you go through either additional withholding or estimated payments during the tax year.
The tax you owe on your unemployment benefits might be minimal depending on how much you received. This is because unemployment doesn’t replace 100% of your previously earned compensation.
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When Filing Separately Makes Sense
However, there are caveats that could make a joint return more financially beneficial.
One large disincentive is that filing separate returns may disqualify couples from getting certain valuable tax credits and deductions, according to Lisa Greene-Lewis, a CPA at TurboTax.
The child and dependent care credit is worth up to $3,000 per for one qualifying individual and $6,000 for two or more. The deduction for interest paid on qualified student loans is worth up to $2,500.
The unemployment tax break would have to yield a larger financial benefit to make sense.
This would tend to be more likely for couples in which each spouse collected ample jobless benefits in 2020, according to tax experts. They would be getting a tax break on the maximum amount or close to it.
This may apply to a fair number of couples. About 40 million people collected benefits last year and the average person got $14,000.
“If you’re not at the max level, run the numbers and see where you stand,” Ortiz said.
It may also make sense to file a separate return if one or both spouses had big medical expenses in 2020 and they itemize their tax return, he said.
“Sometimes in the case of medical bills, there’s a little game there to be played,” he said.
If one spouse itemizes their tax return, the other must, as well .
What If I Don’t Earn An Income Do I Still File A Tax Return
If you didn’t earn any income in the last tax year, you’re not obligated to file a tax return. The IRS has minimum income requirements that change annually based on inflation as well as your tax status, such as single, married filing separately or jointly, head of household, etc. When you fall below the threshold, you are not required to file a federal tax return. There are, however, some good reasons to file even when you earn little or no income.
If you had very low or no income last year and are not required to file, you may wish to file anyway to claim certain refundable tax credits. Refundable tax credits can provide you with a tax refund even when you do not work. For example, you may qualify for the Earned Income Tax Credit or the Additional Child Tax Credit, which are refundable tax credits.
Even if you earned very little last year, you might wish to file a tax return simply to get back any taxes withheld from your pay. This usually happens when a taxpayer is employed for only a small part of the calendar year. Also, if you’re attending college or a higher education program and earn little or no income, you may wish to file a return to take advantage of the American Opportunity credit.
If you received any health care tax credits or subsidies for the past tax year, you’ll need to file to keep receiving them, even if you normally wouldn’t be required to file. For more on this please see our article on the Affordable Care Act
Child Care Expenses Deduction And Unemployment
You may write off the cost of childcare expenses on your taxes, and this does not change even if you are unemployed. There is no expectation to withdraw your children from care simply because you are not working. In fact, one of the provisions of receiving EI is that you are seeking work and ready to start, conditions that may be hard to meet if your children are withdrawn from care.
What If I Never Received A Stimulus Payment
If you didn’t receive the full payment you were entitled to, then it’s possible that when you are filing your 2020 tax return you may end up getting more money, says Eric Bronnenkant, head of tax at financial services firm Betterment.
If your economic situation changed let’s say you qualified based on 2018 or 2019 income because it was lower, but your economic situation improved for 2020 the IRS actually can’t ask for any of that money back, Bronnenkant adds. Your situation can’t get worse in that scenario.
Taxpayers will need to file a 2020 federal income tax return to claim the Recovery Rebate Credit if they didn’t get their Economic Impact Payments or they received less money than they’re eligible to get, such as if a child’s credit wasn’t included in the payout.
The Recovery Rebate Credit is listed on Line 30 of the 1040 Form for the 2020 tax year.
Aimee Picchi and Susan Tompor
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Coronavirus Unemployment Benefits And Economic Impact Payments
You may have received unemployment benefits or an EIP in 2020 due to the COVID-19 pandemic.
Unemployment compensation is considered taxable income. You must report unemployment benefits on your tax return if you are required to file.
If you received the EIP, you do not need to report it as income whether youre required to file a tax return or not. If you did not receive some or all of your stimulus payments, you may claim missing stimulus money that you are owed by filing for a Recovery Rebate Credit on your 2020 return.
How Can I File For Unemployment Online
Due to the COVID-19 pandemic, unemployment rates rose sharply in the United States in the spring of 2020. By the end of April, a staggering 30 million Americans had filed for unemployment benefits. Even worse, months later, many jobless people were still desperately trying to cut through all the red tape and the massive volume of people to file their own unemployment claims. Since those early days of chaos, most states have adapted and made improvements to handle all the claims. If youre wondering how to file a claim after all the changes, we can help you figure it out.
To qualify for unemployment, an individual who lost their job must be eligible for work, able to work and actively seeking employment. Without a doubt, the ongoing pandemic throws a bit of a wrench into the process of actively seeking work, so that component may vary from state to state and could change at any time. Texas, for example, waived their work search requirement for many months but reinstated it on November 1. If you lost your job due to the pandemic or other reasons, here are the steps to take next to file an unemployment claim online.
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Need Help With Your Taxes
- Code for Americas Get Your Refund website: Visit Get Your Refund to connect with an IRS-certified volunteer who will help you file your taxes. First, you will upload your tax documents online. Then, an IRS-certified volunteer will call you to discuss, prepare, and review your tax return for filing.
- Volunteer Income Tax Assistance and Tax-Aide sites: VITA and Tax-Aide sites are IRS-sponsored programs that provide free tax preparation for those who earn less than about $56,000.
The deadline to file your taxes this year is May 17, 2021.