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Beware of this tax trap if you had unemployment income during Covid

Beware of this tax trap if you had unemployment income during Covid

February 15, 2021 03:00 by NewsDesk

The 2020 tax season is officially underway, and the millions of Americans who collected unemployment benefits last year as a result of the coronavirus pandemic may come as a surprise.

Unemployment income is taxable, and if you have not set aside money or withheld for this tax, it can reduce your refund or even lead to an account.

This may be particularly unexpected for independent contractors and self-employed persons who are not normally eligible for government benefits but may have received Pandemic Unemployment Assistance through the CARES Act.

“There are going to be a lot of people who have unemployment insurance this year and do not normally receive unemployment insurance benefits,” said Elaine Maag, a lead research fellow at the Urban-Brookings Tax Policy Center. “So it will be something new that they need to pay attention to.”

Differences in state and federal treatment

If you had any unemployment income last year, it is subject to tax and should be reported on your income tax return for 2020. In January, those with unemployment incomes should have received a Form 1099-G that spells out the amount paid out during the year.

Federal income tax applies to these benefits – whether it is state unemployment insurance or the pandemic unemployment benefit paid out under the CARES Act.

The catch is that the exemption from the applicable amount of income tax is voluntary. You can choose to withhold a flat 10% of your benefits to cover the tax liability.

To do so, you must submit Form W-V4 to the government agency that administers your unemployment.

You can also choose to make quarterly estimated tax payments to the IRS.

Uncle Sam is not the only entity looking for a share of your unemployment income. Most states will also tax these benefits.

A Handful of States – Alabama, California, Montana, New Jersey, Pennsylvania and Virginia – do not tax these payments. According to Andy Phillips, director of the Tax Institute at H&R Block, Indiana and Wisconsin offer a partial exclusion from unemployment income.

“Some states withhold, and others require it to lighten surprises when tax time comes,” said Jared Walczak, vice president of state projects at the Tax Foundation.

While it’s too late to collect the taxes you owe for 2020, individuals who close their returns early can at least plan to pay the amount due by April 15 – the due date for tax returns and debts.

“You only have to make a payment on April 15, but it is better to know at the end of January or early February that you have to come up with the dollar amount by that time,” Phillips told the Tax Institute at H&R Block. .

Unemployment and tax credits

Families who received unemployment income during 2020 should also be on the lookout for two key credits while filing taxes: the income tax credit and the child tax credit.

Both credits are significant dollars – the earnings tax credit is worth up to $ 6,600 for a low-income household with three or more qualifying children. And the refundable portion of the child tax credit is worth up to $ 1400 per qualifying child.

More about smart tax planning:
Crypto falls in value. What it means for tax
State tax departments turn their attention to pro-athletes
People fled these countries with high taxes in 2020

The catch? While unemployment benefits are taxable, they are not considered earnings.

Under normal circumstances, receiving unemployment will result in a reduction in both credits when you file your tax return.

Lawmakers corrected this issue during year-end Covid legal aid. This year, when you file your 2020 tax, you have the option to use your income for 2019 to calculate the credit calculation.

“If you switch from a wage earner to applying for unemployment, you could be affected,” Phillips said. “Using your earnings for 2019 just to determine the amount of credits can be a huge benefit to taxpayers.”

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Tags Beware, business news, Coronavirus, COVID, COVID-19, Domestic Tax Service, Income, income tax, Local tax, National tax, Personal finances, tax, Tax account, Tax Refunds, taxation, Taxes and government revenue, Taxes on the state, Trap, unemployment, unemployment insurance

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