States Where There Is No Unemployment Tax Break
So far, 11 states have said they arent adopting the federal unemployment tax cut, according to H& R Block data: Colorado, Georgia, Hawaii, Idaho, Kentucky, Minnesota, Mississippi, North Carolina, New York, Rhode Island, and South Carolina.
If you live in one of those 11 states and you filed your taxes after the American Rescue Plan was passed, you should not have excluded your unemployment benefits from your taxable income. If you did, youll need to file an amended return to remedy the issue, says Henry Grzes, lead manager for tax practice and ethics at the American Institute of Certified Public Accountants.
Other states dont tax unemployment benefits, including Alabama, New Hampshire, and New Jersey. So theres no need to take further action with your return.
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What Are The Unemployment Tax Rules For 2021
In March 2021, President Joe Biden signed into law a massive relief bill called the American Rescue Plan Act . One of the things it did was allow the first $10,200 in unemployment benefits collected in 2020 to be waived from federal income taxes for those with household incomes of as much as $150,000.
However, there’s been no sign that a similar tax break might be offered for the 2021 tax year.”No unemployment compensation exclusion is on the books for tax year 2021,” says Angela Anderson, a certified public accountant who provides professional advice through the online question-and-answer service JustAnswer. “However, just because that is the case now, does not mean that the situation will not change.”
Quick tip: When applying for unemployment benefits, you can file Form W-4V to request withholdings to pay for income taxes. Unemployment withholdings have a standardized rate of 10%.
How The Earned Income Tax Credit Could Help
If youre worried you might face a large tax bill in April, see if the Earned Income Tax Credit can help offset those costs. This credit is for people with low to moderate income and reduces the amount of tax you may owe. The credit is refundable, meaning if it makes your tax bill less than zero, you could receive a refund from the government.
The EITC can provide between $538 and $6,660 in tax credits, depending on earned income amounts and number of dependents.
The 2020 income limit for EITC is $15,820 for single filers and $21,710 for married couples filing jointly, according to the IRS. Those thresholds sound low, but increase dramatically if you have qualifying children.
These income limits are based on total income, which means youll need to include unemployment benefits in the calculation for eligibility. However, a separate eligibility test requires you to haveactual earned income, which does not include unemployment benefits.
If that sounds confusing, it is. Fortunately, the IRS has an EITC Assistant to help you estimate whether youll be eligible for this important tax benefit for 2020. In many cases, any numbers you plug in at this point are just a guess, since you dont know when youll get a new job, how much it will pay, or how much in unemployment benefits youll end up receiving.
Definitely not enough people take the EITC to begin with, and thats because they dont even know that they qualify, Cagan says. Its still worth looking into.
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Last Resort: Do Nothing
Technically, you could collect your full unemployment check without withholding and ignore your tax liability until you file your returns next year. There’s no good reason to do this, however. You will eventually have to pay the taxes, along with penalties and interest from the IRS and, possibly, your state.
The IRS penalty is based on prevailing interest rates and was 3.398% of your underpayment in the 2019 tax year, or about $34 for every $1,000 of estimated taxes you should have paid. If you live in a state that taxes unemployment income, you could face additional penalties at the state level.
If You Cant Pay Your Taxes On Time
If you do end up owing the government money and cant pay your taxes on time, the IRS offers several payment plan options that can help you.
But be aware that not paying the full amount you owe by the filing deadline will mean youll pay interest and possibly penalties on the unpaid amount even if you arrange a payment plan with the IRS.
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What If I Never Received A Stimulus Payment
If you didnt receive the full payment you were entitled to, then its 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 lets say you qualified based on 2018 or 2019 income because it was lower, but your economic situation improved for 2020 the IRS actually cant ask for any of that money back, Bronnenkant adds. Your situation cant get worse in that scenario.
Taxpayers will need to file a 2020 federal income tax return to claim the Recovery Rebate Credit if they didnt get their Economic Impact Payments or they received less money than theyre eligible to get, such as if a childs credit wasnt 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
Follow Aimee on Twitter and Susan .
The 2021 IRS deadline for filing your taxes has been pushed to May 17 to give people more time to get organized in the wake of the COVID-19 pandemic.
Even with this extra time, your situation is likely to be even more complicated if youve been unemployed during the course of the pandemic since you have to pay taxes on federal unemployment if you earned above a certain amount in benefits.
What Can Disqualify You From Receiving Unemployment Benefits
Each state has its own unemployment criteria and rules. Unemployment programs typically require you to be unemployed through no fault of your own and meet work and wage requirements. If you quit or were fired for cause, you usually don’t qualify for unemployment. Self-employed people and contract workers usually aren’t eligible for unemployment benefits, but the CARES Act allowed states to extend unemployment benefits to these individuals.
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Do I Have To Pay To Prepare My Taxes If I Received Unemployment
No. If you made under $72,000 in 2020, you are eligible to file your taxes for free . Even if you made more than that, many tax preparation services now include a 1099-G as part of a simple tax return, which they will let you file free of charge.
But buyer beware: So-called free tax preparation softwares are often trying to push you to pay them more money.
Reporting On Original Tax Return
When youre using an e-file application, youll be notified that you did not report your unemployment compensation, or that the amount you reported does not match our records. If you indicate that you didnt have any compensation, the system will let you continue. However, your refund will be held up, and youll receive a letter requesting that you submit documentation to verify the correct amount.
- A corrected Form 1099-G Certain Government Payments
- Documents that can prove the correct benefits
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I Filed My Taxes Before The Stimulus Bill Was Signed Do I Have To Do Anything
No. The IRS will automatically recalculate the amount of taxes due and give you a refund if you overpaid, so long as your overall tax situation stays the same.
The only reason youd have to file an amended return is if the law makes you newly eligible for a tax break like the Earned Income Tax Credit. If this applies to you, you can file an amended return using Form 1040X.
Filing Form 940 With The Irs
IRS Form 940 is due on January 31 of the year after the year of the report information. For example, the 940 for 2020 is due January 31, 2021. The best way to file by IRS E-file.
The calculations for FUTA tax are complicated. A payroll processing service can help you figure out how much to pay and when.
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Taxes Deductions And Tax Forms For Unemployment Benefits
Youre responsible for paying federal and state income taxes on the unemployment benefits you receive. The Department of Unemployment Assistance does not automatically withhold taxes, but you may request that taxes be withheld from your weekly benefits when you file your claim.
Your weekly benefits may also be reduced if you have a child support order or if you receive an overpayment on your weekly benefit.
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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Dont Get Hit With Unexpected Tax Bill From Unemployment Insurance Payments New York State Tax Department Shares Money
For Release: Immediate, Tuesday, September 22, 2020
For press inquiries only, contact: James Gazzale, 518-457-7377
The New York State Department of Taxation and Finance today encouraged New Yorkers to review their current tax situation. By taking a closer look at your tax records now, you can ensure you dont end up owing unpaid taxes, and you may be able to claim valuable tax credits when you file your income tax return next year.
We understand many New York taxpayers are facing challenges this year, which is why were reminding them of all the money-saving tax programs and refundable tax credits available, said New York State Commissioner of Taxation and Finance Mike Schmidt. We also want taxpayers to understand that unemployment insurance payments are taxable. As a result, some taxpayers may need to adjust their withholding to prevent a tax bill in 2021.
Unemployment benefits are taxable benefits
If you are receiving unemployment benefits, consider having tax withheld from these payments to avoid owing taxes when you file your federal and New York State income tax return next year. New York State unemployment insurance benefits and any of the special unemployment compensation authorized under the Coronavirus Relief Act are considered taxable income. By law, the New York State Department of Labor must report these benefits to the IRS and to the New York State Tax Department.
Tax credits put money back in your pocket
Can I Have Taxes Withheld From Unemployment Payments
Yes. State unemployment agencies allow you to have federal and state taxes taken out of your unemployment checks, and the IRS recommends you do this to avoid surprise tax bills. You can set this up when you first apply for unemployment, or at any point while you are receiving it, by filing Form W-4V. Most states allow you to do this online as well, and their unemployment websites are listed on a Department of Labor directory.
If you had federal taxes withheld from your unemployment benefits throughout the year, its possible the new $10,200 exemption will make you eligible for a refund. The IRS will automatically calculate this and give you a refund if necessary.
Important: The $10,200 unemployment tax exemption only applies to 2020. If you are receiving unemployment benefits at any point in 2021, setting up a withholding now may save you from a surprise tax bill next year.
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How The Unemployment Landscape Changed
With the U.S. experiencing unemployment rates last year that have not been seen since the Great Depression, Congress had to act quickly to mitigate the effects. To help Americans cope, lawmakers passed the CARES Act, a $2 trillion coronavirus relief package, that boosted unemployment benefits by $600 a week.
The CARES Act also created the Pandemic Unemployment Assistance program, which expanded the eligibility for benefits to include gig workers, independent contractors, self-employed Americans and those who would not traditionally qualify for assistance.
After the initial $600 enhanced unemployment benefits ended in July, an additional $300 boost was granted in August and later extended by lawmakers in December. The $900 billion relief package passed in December extended the program through March 14, as well as the Pandemic Emergency Unemployment Compensation and PUA programs, both of which were set to expire at the end of 2020.
Unemployment benefits replaced about 45% of a worker’s pay nationally in 2019, according the Department of Labor. In terms of dollars, the Brookings Institution estimates that the national average weekly payment was $387 prior to the coronavirus pandemic. But that varies widely by state. Mississippi, for example, paid an average of $215 per week, while those in Massachusetts received $550 per week, on average.
Help With Unemployment Benefits And How To File Your Taxes
We understand that you may have a lot on your plate right now. Where your taxes are concerned, H& R Block is here to help. Be sure to visit our Unemployment Tax Resource Center for help with unemployment related topics.
Free tax filing with unemployment income: You can include your Form 1099-G for free with H& R Block Online Free.
Worried your taxes are too complex for H& R Block Free Online? Check out Blocks other ways to file.
Related Topics
Finding your taxable income is an important part of filing taxes. Learn how to calculate your taxable income with help from the experts at H& R Block.
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What To Do If You Owe Taxes On Unemployment Benefits
After going through these steps, you may find that you owe taxes to the IRS. If you do, donât panic. You have options.
However, not paying that tax bill is not one of those options. You should make every effort to pay as much of your tax bill as possible. Not paying your tax bill means that youâll immediately face additional penalties for late payment, as well as interest that accrues on your unpaid taxes. If you continue to not file your taxes, the IRS may seek legal remedy against you.
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Next Steps For My Tax Bill
Accountant Sue Baer, of Baer Tax Group in upstate New York, points to the fact that, on average, most people are not above a 10% tax bracket, which, when you factor in total income and standard deductions, may mean your tax situation isn’t all gloom and doom.
“Don’t panic and think it’s a large number that is due,” Baer points out. “It may not be.”
And Congress may ultimately pass legislation to ease the tax burden on unemployed Americans potentially through the Coronavirus Unemployment Benefits Tax Relief Act but that remains to be seen. I may wait till closer to the to pay my tax bill to see what happens with this legislation.
After collecting unemployment for 24 weeks tax-free, I am back to work. That said, both Baer and Hawver’s advice to those who continue to collect is crystal clear: Visit your state’s unemployment website and elect to have taxes taken out if you’re still collecting UI.
I know, I know, you’re already running short on cash to cover your bills remember, that’s what got me in this very jam about which I’m writing! But in the big scheme of things, Hawver equates it to “having a little bit more in the pot when it comes time to do the taxes.”
This year, taxes are due in full by April 15. So get going! Do your taxes, see what the bottom line looks like, and go from there. What’s that old adage? Better the devil you know that the devil you don’t…
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