Why Must Some Amend Their Returns
Beginning in May and continuing into the summer, the IRS will automatically refund taxpayers who filed their returns without claiming the new tax break on unemployment benefits, it said, but this was in regards to their federal return.
Some states may still opt to tax jobless aid, tax experts say. That means some taxpayers may have to file an amended return to get their maximum refund if the unemployment tax break now makes them eligible for additional tax credits that were not claimed on their original return, or if they mistakenly excluded their unemployment income in states that choose to still tax the jobless aid.
Otherwise, the IRS said it will recalculate returns of taxpayers by incorporating the $10,200 exclusion and either refund them or apply it to other taxes they owe.
While many states will follow suit and automatically refund taxpayers, there are a handful of states that are requiring taxpayers to file an amended tax return to receive the benefit of the unemployment tax break if they filed before the American Rescue Plan was signed, says Curtis Campbell, president of TaxAct, a tax preparation software.
This varies by state. Taxpayers who filed their returns before the American Rescue Plan became law in March may need to file an amended state tax return to get a state refund.
New Mexico, for instance, has advised taxpayers to amend their returns if they were filed before mid-March.
Rights Of Fired Employees
If youve been fired from your job, you do have some rights. While most employees are considered at will, which means they can be fired at any time and for any reason almost. Some terminations are considered illegal, in which case you may have a lawsuit and you may collection unemployment. These situations are:
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An implied contract was violated
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The firing violates public policy
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The employee was discriminated against
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Termination was in retaliation for an act protected by law
If youve been fired, and justly so, you may not qualify for unemployment insurance benefits, but you do deserve your last paycheck. Some states have laws on how quickly that check must be paid. Severance pay is not legally required unless it has been promised to you in writing or orally.
Many people who have been fired are concerned about their health insurance, especially when its funded by their employer. The Consolidated Omnibus Budget Reconciliation Act, or COBRA as its better known as, gives the employee and their insured family members the option to continue insurance for a predetermined period of time.
You might be able to receive unemployment if you were fired or downsized due to no fault on your part. If you did something, or didnt do something, that caused you to be let go from your job, chances are that you wont receive benefits.
Reporting Unemployment Benefits At The State And Local Level
If your state, county, or city collects income tax on your unemployment benefits, keep your Form 1099-G for reference. You may have to attach it to your state, county, or local income tax return. If so, keep a copy for yourself.
Check with your states Department of Revenue and relevant county and local government tax agency for instructions on how to report your unemployment benefits at the state and local level.
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How Does Unemployment Insurance Usually Work
In the United States, federal and state unemployment insurance programs have existed in some form since the 1930s. Unemployment programs are administered at the state level. Still, the system is funded by businesses paying Federal Unemployment Tax Act taxes and State Unemployment Tax Act taxes.
These programs are designed to temporarily provide financial assistance when a worker loses their job and is currently looking for a new one. Workers who are laid off, have lost seasonal work or have been furloughed are allowed to apply for unemployment insurance.
In most U.S. states, laid-off workers are typically able to receive 26 weeks of unemployment benefits and a percentage of their average annual pay. How much a worker can receive depends on how much money they made in their last job and in what state they reside.
Once a worker has been laid off, they can then submit an unemployment claim to their state government. This claim formally notifies the government and the former employer that the worker is seeking unemployment insurance. In some cases such as the worker being fired for cause the former employer may deny the unemployment claim.
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Will I Owe Taxes Because Of My Unemployment Compensation
- Generally, states dont 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 cant pay. In the short-term, the penalties for filing late are higher than the penalties for paying late.
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How To Pay Taxes On Unemployment
The three most common ways to pay those taxes include: paying them when you file your tax return, making estimated payments during the year, or having them automatically withheld which experts say is often the best option.
If people have the capacity, they have the cash flow, and they think that they can
forgo a little bit of their unemployment check each week, its so much easier to do the small incremental withholding amount than it is to come up with a large payment out of pocket, Rigney said.
When you first apply for unemployment, you should have the option to elect automatic withholding. If you didnt do this, you can do this by filing a W-4V, or Voluntary Withholding Request, to have your state and federal taxes withheld automatically from your unemployment check.
By Jan. 31, youll receive a Form 1099-G, or Certain Government Payment, from your state, listing the amount of payment youve received and the amount withheld, if applicable. You should use that form to fill out your tax returns.
Last, you can wait until tax day to make your full tax payment. But if you received unemployment for much of the year, you may be subject to penalties for not paying enough tax during the year through withholding or estimated payments. You also could face a huge tax bill in April that could create a cash crunch. Its better to plan ahead.
Denitsa is a reporter for Yahoo Finance and Cashay. Follow her on Twitter .
Read more information and tips in our Taxes section
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The above article is intended to provide generalized financial information designed to educate a broad segment of the public it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
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Federal Income Tax Return Requirements
Although you may not need to pay unemployment taxes in your state, benefits are taxable on your federal return. If you have a low or modest income, you may not need to file a federal tax return for the year. According to IRS Publication 501, Dependents, Standard Deduction, and Filing Information for 2020, of the 2020 filing, you are not required to file a return if you are under age 65 and earn less than $12,400 as a single taxpayer. For taxpayers over age 65, you are required to file a return if your earnings exceed $14,050. A couple under age 65 can earn $24,800 without having to file taxes. If the one spouse is over 65, the limit is raised to $26,100. When both spouses are older than 65, a tax return is not required unless earnings are greater than $27,400.
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Severance Pay And Unemployment
As a recently laid-off employee, youd probably be glad to learn that your soon-to-be former employer offered a severance package. However, its important to know how severance works, in order to reduce the chances of financial surprises down the road. Its not exactly the same as receiving your regular paycheck.
For example, youll need to pay taxes on your severance, whether you receive it in a lump sum or at regular intervals, just as you pay taxes on your standard paycheck.
Taxes on severance may be higher, depending on the method your employer chooses to determine your pay.
Depending on where you live, receiving severance might impact your unemployment, reducing or delaying your potential payout.
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Should I Just Submit For An Extension On Filing My Taxes
Spivey said she anticipates a significant number of people that will not do this year, and then get charged penalties and interest. Sometimes people then experience a snowball effect, she said. They dont do one year and then it causes anxiety, and then they just dont do them for a couple of years.
Spivey strongly encouraged people to file their taxes to avoid getting sucked into this cycle. If you need more time, submitting for an extension via a Form 4868 will buy you until Oct. 15 to file your tax return.
If youre anticipating needing help to file, remember that filing after the official deadline will mean that many of the free and low-cost options for tax prep that would have been available before that date are no longer available. And speaking of tax help
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If You Included Your Unemployment Income Already The Irs Wont Require You To File An Amended Tax Return In Most Cases
Since we are in the middle of tax season, you may have already filed and claimed your full unemployment benefits on your tax return.
According to the IRS, more than 23 million Americans filed for unemployment last year. On March 31, the IRS announced taxpayers who have already filed would not have to resubmit their tax returns in most cases the IRS will adjust qualifying returns automatically in two phases.
The IRS will start with single taxpayers who qualify for the tax break and then process taxpayers who filed jointly. It estimates that taxpayers will begin to receive tax refunds as early as May, and the agency will continue to process refunds through the summer. If you owe taxes, the IRS will apply any adjustment to outstanding taxes due.
However, if you expect your tax return adjustment makes you eligible for a tax credit or an increase of a tax credit previously claimed, you will need to file an amended tax return to claim the credit.
For example, lets say, for instance, you qualify for the Earned Income Tax Credit . However, because of the unemployment tax break, your income has changed and you may now be eligible for a higher credit. In this instance, the IRS requests you to file an amended tax return to claim the increase or any other credit you may now be entitled to due to the reduction of income.
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How To Get Your 1099
IDES will send your 1099-G form through email or mail . If you have additional questions about accessing your 1099-G form, please call IDES at 244-5631.
View the 1099-G Infographic for more information:
If you cannot access your 1099-G form, you may need to reset your password within IDES’s secure website. Please note that this site differs from the system used by PUA claimants, and your password may have expired.
Filing Taxes While Unemployed
You still need to file your taxes even if you were unemployed for the entire year. It will indicate to the IRS whether or not you received unemployment benefits, as well as if you wish to claim any tax credits or deductions.
The good news is you have multiple options for how you file your taxes and pay for tax liability.
Taxpayers may decide to have the taxes owed withheld from upcoming unemployment compensation, or unemployed individuals may decide to pay estimated quarterly taxes to avoid a bigger lump sum at the end of the year.
You should make yourself aware of whether or not paying estimated quarterly taxes makes the most sense for you. Unfortunately, the IRS does penalize taxpayers who underpay throughout the year if they wait until April for the lump sum, which many unemployed individuals cannot afford.
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How Much Tax Is Taken Out Of Unemployment Compensation
You can choose whether or not to withhold federal taxes at a rate of 10% if you collect unemployment benefits. Some states may allow you to withhold 5% for state taxes. You may have to pay estimated quarterly payments or pay taxes when you file your annual tax return if you don’t have taxes taken out of your unemployment checks. Either way, your unemployment income is considered taxable income, just like any other wages or salaries you receive.
What Can You Do If You Receive A Smaller Refund
Think of your tax bill like a report card, says Farrington.
The school year ended on December 31.
Now you are waiting for the results, she says.
There’s still time to get some proverbial extra credit in the form of a reduction in your taxable income.
If you have a health savings account, for example, you have until tax day to make contributions that can be deducted from your 2022 income. By 2022, individual taxpayers could contribute up to $3,650 and families up to $7,300.
Traditional IRA owners can make a similar move.
Contributing to one of these accounts can have multiple benefits, says Farrington: “You can reduce your taxable income while saving money for yourself.”
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Free Federal Tax Filing Services
The IRS offers free services to help you with your federal tax return. Free File is a service available through the IRS that offers free federal tax preparation and e-file options for all taxpayers. Free File is available in English and Spanish. To learn more about Free File and your free filing options, visit www.irs.gov/uac/free-file-do-your-federal-taxes-for-free.
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Even if lowering your bill isn’t among your goals, it pays to be proactive about what you owe .
Once you have your tax documents together, prepare your return as soon as possible.
You won’t actually have to apply until mid-April, but in the meantime you can find out where you stand.
If you don’t get the refund you expected, or if you owe an unexpected bill, finding out early will give you time to save and make up the shortfall.
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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.
What Is Reported On My 1099
DES reports the total amount of unemployment benefits paid to you in the previous calendar year on your 1099-G. This amount is based upon the actual payment dates, not the period covered by the payment or the date you requested the payment. This amount may include the total of benefits from more than one claim.
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If You Owe Tax That You Can’t Pay
If youre receiving unemployment benefits and don’t meet your tax obligations, you may end up with a lump sum of tax due when you file your return. This could create a financial hardship for you because you’re already receiving financial assistancepaying all of your taxes at once might drain your resources. For some taxpayers, this could mean deciding between paying the rent and buying groceries, or sending estimated tax payments to the IRS. If you find yourself in this situation, there are some options.
You can apply for a short-term or long-term installment agreement with the IRS to satisfy your tax debt in monthly payments. You file Form 9465 with the IRS. Form 9465 helps you determine the amount the IRS would like you to pay over a term of 72 months. However, it allows you to select lesser payments if you can justify on Form 433-F why you cannot make the payment determined on Form 9465.
You can also ask the IRS to waive any underpayment penalty thats been assessed against you if you feel it would be inequitable to require you to pay the penalty. You might also qualify for a waiver if you became disabled during the year you collected unemployment or retired during that year and were at least 62 years old.
