Are You Collecting Jobless Benefits In 2021
Right now, all jobless benefits are taxable on federal returns in 2021. Yet taxes are not withheld automatically from jobless benefits. So if you want to have taxes withheld, you need to address that.
“Many people are surprised to learn that unemployment is taxable and they didnt opt to withhold taxes,” said Kathy Pickering, chief tax officer at H& R Block.
Next year could prove to be even more confusing, too, if you’re expecting the tax rules on jobless benefits to be the same as they were on 2020 income tax returns.
A limited tax rule change, which went into law March 11, enabled single taxpayers to exclude up to $10,200 of unemployment benefits received in 2020 from taxable income on their federal returns or as much as $20,400 for married couples filing jointly.
But that tax break only applied to 2020. So, unless something changes in the months ahead, you’re on the hook for treating all unemployment compensation received in 2021 as taxable income.
But Luscombe noted it remains possible that Congress could enact another retroactive exclusion later this year.
No one knows, of course, whether the current tax rule will stay in place or if we’ll see another waiver.
If all those benefits remain taxable, though, you could be looking at a tax headache if you don’t make some adjustments.
Someone who is applying for unemployment compensation now could request that taxes be withheld from their benefits.
Tax Privacy And Security Tips
One understandable concern weve heard from readers is the desire to know how these tax tools protect your privacy and financial information. The good news is, the government has been taking steps to make sure that doing your taxes online is more secure. For example, in 2020, the IRS mandated multi-factor authentication for all online tax-prep tools . We also looked at the privacy and security policies for the tax software we tested and asked the companies for information on how they safeguard customer data. The answer: All of them encrypt the data when its stored on their systems and follow the IRSs standards for electronically sending returns securely.
The bad news is that the nature of the internet means theres no such thing as 100% secure tax filing, and tax-prep services are especially common targets for hackers. We looked into software breaches from previous years at TurboTax and H& R Block and found that the breaches were caused by credential stuffingidentity thieves used passwords and usernames stolen from other services to log in to the tax software. The best thing you can do to protect yourself is to follow strong security practices, which includes never reusing the same password for different accounts. A password manager can help you create a strong, unique password for all of your accounts. Other recommendations:
Do You Have To Pay Taxes On Unemployment
Yes. The IRS considers unemployment benefits “taxable income.” When filing this spring, your unemployment checks from 2021 will be counted as income, taxed at your regular rate. This applies both to standard unemployment benefits and the expanded benefits that were available to some during 2021.
Unlike traditional employment, where taxes are withheld from your paycheck, you’re not required to have federal taxes withheld from your benefit payments. Unless you opted to have taxes withheld, you could end up owing taxes when you file your tax return.
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Which States Dont Tax Unemployment Benefits
The remaining states either dont tax income or dont tax unemployment benefits.
States that dont tax unemployment benefits:
They are: Alabama, Arkansas, California, Delaware, Maryland, Montana, New Jersey, Pennsylvania, Virginia.
Which states dont tax income?
There are nine states that don’t have income tax, but two of them still require taxpayers to file a tax return under certain circumstances. In New Hampshire and Tennessee, if an individual taxpayer receives more than $2,400 or $1,250, respectively, in interest and dividend income, they have to file. In the other seven states taxpayers technically only have to file a federal income tax return.
They are: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming, but you might not be off the hook completely.
In the remaining taxable 42 states and the District of Columbia, you will need to file a tax return if you reside there or are a resident. Some states have already changed their filing deadlines to synch with the extended federal deadline of 17 May, Oklahoma, Louisiana and Texas have until 15 June. The IRS provides a list of state tax agenciesto check what the filing deadline is where you are a resident.
Third Stimulus Check: Latest Updates
You’ll also find news on other provisions in Bidens economic-aid package, such as an enhanced child tax credit that offers qualifying families up to $3,000 per child aged six to 17, and $3,600 per child below six.
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How To Claim Unemployment Benefits
Each state has its own guidelines for how to claim unemployment benefits. There are also, typically, requirements you must follow to continue receiving the benefits.
The first thing to do is gather the documents you will need to file your claim. This is because when you file a claim, your states unemployment insurance agency will ask you for details around your former employment, such as addresses and dates. You should take the time to provide the most complete and accurate information you can, as it lessens the chances of your claim being delayed.
Second, you should contact your State Unemployment Insurance agency as soon as possible after you become unemployed. You dont always have to walk into an office because in some states it is now possible to file a claim by telephone or over the Internet.
A general tip is that you should file your claim with the state where you worked. However, if you lived in one state but worked in another or you worked in multiple states, the unemployment insurance agency of the state where you live now can help you with information on how to file your claims with the other states.
Usually, youll get your first benefit check about two to three weeks after youve filed your claim if you qualify.
There Are 13 States That Havent Waived Taxes On The First $10200 Of Unemployment Benefits Meaning Taxpayers Will Need To Pay State Taxes On That Income
The American Rescue Plan passed in March gave an extra bit of help to those who were unemployed in 2020 and collected jobless aid. The law waives federal tax on up to $10,200 of unemployment compensation per person received in 2020.
The waiver is available to individuals and couples who have an adjusted gross income of less than $150,000. Last week the IRS updated its guidanceallowing workers to exclude unemployment compensation from AGI calculations. The tax agency has said that taxpayers that have already filed should absolutely not file an amended return but wait for further guidance.
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Eligibility For Unemployment Benefits
The first big question to tackle is to see if you qualify for unemployment benefits. Though the Department of Labor administers the guidelines, each state has its own separate requirements to qualify.
There are generally two requirements youll have to meet:
Contact your State Unemployment Insurance agency to look at the other requirements and also to file a claim.
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.
Should You Wait To File Your 2020 Return Is Caught In An Irs Backlog
Many people are wondering what to do if their tax returns from last year are held up somewhere in the IRS system. Should you then wait to file a 2021 tax return this year?
It sounds like an odd question until you realize that millions of returns are buried in an IRS backlog.
As of mid-December, the IRS had a backlog of 6.2 million unprocessed 1040 individual returns and 2.4 million unprocessed amended individual returns, Form 1040-X, according to a report by the National Taxpayer Advocate.
“While much of the processing delay is related to tax year 2020 paper returns, some taxpayers are still waiting for resolution of their electronically filed 2020 tax returns, amended returns, and correspondence replying to IRS notices,” according to the advocate’s report.
So do you need to wait? No.
The IRS says: “Taxpayers generally will not need to wait for their 2020 return to be fully processed to file their 2021 tax returns and can file when they are ready.”
The IRS also offered another tip to help with e-filing a 2021 tax return if you’re still waiting for a 2020 return to be processed.
“In order to validate and successfully submit an electronically filed tax return to the IRS, taxpayers need their Adjusted Gross Income, or AGI, from their most recent tax return,” the IRS said.
But remember, everyone else should enter their prior years AGI from last years return.
How To Avoid A Large Tax Bill In The Future
Whether or not you decide to withhold taxes from your unemployment benefits depends on your financial situation. If you need the full payment to get by, it may sound appealing to put off paying taxes in the hope of being in a stronger financial situation later on. That noted, it can be devastating to get hit with a big tax bill in the spring.
Many sole proprietors and freelancers make estimated quarterly tax payments, which lets you spread out what you owe into four annual payments. That noted, because these payments are based on your estimated total income, you could end up paying too much — resulting in a refund — or too little — which would require an extra payment come the April 18 deadline.
To have your unemployment checks taxed like a regular paycheck, you can fill out Form W-4V. Since taxes will be withheld from each payment, it will reduce the amount you receive weekly, but can prevent you from owing a hefty tax bill the following tax season.
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How To Claim The Unemployment Tax Break
Filing your taxes online with H& R Block our top pick for tax software this year or TurboTax is easy. All you need to do is create an account and upload your income statements and other tax documents. Both companies offer free plans for simple tax situations.
You’ll be guided through a question-and-answer style process to fill out your federal return, and your state return if you’re filing one. To report unemployment benefits from 2020, you need Form 1099-G . You should have received this form by now, either in the mail or as a digital document through your state’s unemployment website.
Whichever tax platform you’re using will ask for the total amount of benefits received in 2020, which you can find in Box 1 on Form 1099-G. In Box 4, you’ll see the amount that was withheld for federal taxes, if any. These are the numbers you need to report. Then, H& R Block or TurboTax will apply the exclusion amount and calculate your remaining taxable unemployment compensation, if any.
Double-check that the amount on your 1099-G reflects the benefits you actually received 2020. Unemployment fraud is rampant and it’s possible a claim was made in your name. Only report the total benefits you received for legitimate claims. If the number is wrong, reach out to your state unemployment office for a corrected form.
If at any point you need help from a tax professional, you can pay extra to get instant access to someone via video chat or phone .
What If My 1099
According to the IRS, taxpayers who receive an incorrect Form 1099-G for unemployment benefits they did not receive should contact the issuing state agency to request a revised Form 1099-G showing they did not receive these benefits. Taxpayers who are unable to obtain a timely, corrected form from states should still file an accurate tax return, reporting only the income they received. The department of labor keeps a directory of each states unemployment office and its website.
In some cases, an incorrect 1099-G form might indicate that you have been the victim of unemployment fraud, which has been a growing problem. Here is how to recognize if this has happened to you.
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Flaws But Not Dealbreakers
More than any other tax-prep software we reviewed, TurboTax kept prompting us to add services such as more advanced support or identity-theft insurancethings that are unnecessary for the majority of households that have basic returns covered by TurboTax Free Edition. This means you need to be vigilant as you click through each screen in order to avoid falling for the unnecessary upsell.
As reported in The Washington Post, TurboTax now asks for additional permissions when setting up your account, which it claims will enrich your financial profile, communicate with you about Intuits services, and provide insights to you and others. In reality, its a way for Intuit to use your tax information to offer you more personalized ads. We strongly urge you to decline this request in order to keep your data as safe as possible. If youve inadvertently accepted and want to prevent Intuit from using your data, you can email [email protected] and let them know that youd like to revoke your consent for use of tax return information.
Did The Stimulus Bill Change How Unemployment Is Taxed
Yes. The American Rescue Plan Act of 2021 changed the tax code so that the first $10,200 of unemployment benefits you received in 2020 is free of federal taxes. That means that only the money you received over $10,200 counts toward your taxable income. For couples filing jointly, each person gets up to $10,200 in tax-free unemployment benefits before they have to start paying federal taxes on that income.
This exemption applies to individual and joint filers who made up to $150,000 in 2020. That number is whats known as a hard cliff that applies regardless of whether you file as single, married or any other filing status. So if your households modified adjusted gross income in 2020 was a total of $150,001, you have to pay taxes on all unemployment benefits.
Learn more about the U.S. progressive tax system here.
Important: Many states have not followed the federal governments lead on this. In many states, such as New York, all unemployment benefits are still subject to state taxes. In other states, like California, unemployment benefits are exempt from state tax. And there are some states that simply have no state income tax. Heres how each state is taxing unemployment in 2021.
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