Lose a job in 2020? Get ready, you could be hit with a tax bill in 2021.
Millions of people lost jobs and claimed unemployment compensation across the country last year as restaurants, retailers, theaters and other businesses faced massive cut backs hit during the coronavirus-induced recession.
And jobless benefits proved to be fairly generous, as the CARES Act offered an extra $600 a week in unemployment benefits beginning in April through July. As a result, some people nationwide may have received $1,000 or so a week in jobless benefits for four months.
And yes, that $600 a week plus regular state unemployment benefits will be considered taxable income when you file your 2020 federal income tax return.
“Unemployment benefits currently are fully included in taxable income,” said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.
But unlike wages, he said, unemployment benefits are not subject to payroll taxes, such as Social Security and Medicare taxes.
Jobless claims hit historic levels during the pandemic
More than one in five workers nationwide were out of work and seeking jobless benefits in the summer. Roughly 33.1 million workers were either on unemployment benefits, had been approved and were waiting for benefits, or had applied and were waiting to get approved, as of June 30, according to the U.S. Department of Labor.
The tax season shocker for many jobless people will be that their tax refund could be far smaller than expected or they might even owe taxes.
“Taxpayers may not be aware that unemployment is taxed,” said Lisa Greene-Lewis, a certified public accountant and tax expert for TurboTax.
How it all plays out will vary. It’s possible, for example, that some families who have been hard hit financially will be eligible on their 2020 income tax return for income based tax benefits that they couldn’t qualify for in 2019.
Greene-Lewis noted that generous tax benefits, such as the Child and Dependent Care Credit, might be available after incomes have fallen and offset some of the potential tax hit regarding jobless benefits.
Those who worked part of the year might be eligible for other tax benefits, too.
“If someone was unemployed but also earned income as an employee or self-employed,” Greene-Lewis said, “they may now be eligible for the Earned Income Tax Credit worth up to $6,660 for a family with three kids when they may have not been eligible before.”
Unlike during the recession a decade ago, taxpayers aren’t getting a federal income tax break on their jobless benefits. Years ago, the American Recovery and Reinvestment Act of 2009 offered a bit of a tax break to jobless people for unemployment compensation paid in 2009 only. On 2009 federal returns, taxpayers were able to exclude up to $2,400 of unemployment compensation from federal taxable income.
Now, you’re not as fortunate on the federal 1040.
While jobless benefits are taxable at the federal level, tax polices vary when it comes to state income taxes.
Luscombe noted that it’s important to remember that many states also tax unemployment benefits.
Residents in six states — Alabama, California, Montana, New Jersey, Pennsylvania and Virginia — will not pay income taxes on jobless benefits even though those states have a state income tax. States that don’t have an income tax, such as Florida, aren’t taxing jobless benefits at the state level.
Where’s your 1099-G?
When it comes to doing your income taxes, the first step involves keeping an eye out for Form 1099-G, Certain Government Payments, to show how much unemployment compensation was paid to you in 2020.
Taxpayers can receive a 1099-G faster if they request an electronic version. The 1099-G form would be available to view online or download by mid-January.
Once you have the Form 1099-G, you need to see Box 1. You’re going to need to claim payments of $10 or more in unemployment compensation, including Railroad Retirement Board payments for unemployment.
“That is taxable and it goes on Schedule 1 of Form 1040, Line 7,” Luscombe said.
Schedule 1 lists additional income and Line 7 is clearly marked “unemployment compensation.”
Did you pay any taxes already?
For some people, the good news is that they might have already withheld some taxes out of their unemployment benefits in 2020. If so, the pain might be far less when you file your income taxes this year.
It’s important that you look at Box 4 on the Form 1099-G. Here is where you’d find federal income taxes that you had withheld out of those jobless benefits.
Some people, though, could be caught by another trap for failing to pay Uncle Sam enough money upfront during 2020.
Luscombe said it is possible that some people who received jobless benefits but did not withhold taxes could be hit with an “estimated tax penalty” on top of the regular income tax that they’re going to owe.
Some may have paid taxes in quarterly installments, which have due dates for the estimated tax payments on April 15, June 15, Sept. 15 and Jan.15 of the following year (or the following business day if the due date falls on a weekend or holiday).
Some who received jobless benefits last year and didn’t pay some taxes already may want to make an estimated payment, if necessary, by Jan. 15 this year. That’s true especially if they’re concerned that they’d owe more than $1,000 in federal income taxes on their 2020 return and could be hit by a penalty, Luscombe said.
Withholding is voluntary. Federal law allows those receiving jobless benefits to choose to have a flat 10% withheld from their benefits to cover part or all of their tax liability. No other percentage or amount is allowed to be withheld to cover federal income taxes on jobless benefits.
To do that, you need to fill out a W-4V form.
Upset that you owe too much in taxes? And you’re still out of work in 2021? You still can opt to have taxes withheld out of upcoming unemployment compensation.