EmirMemedovski / Getty Images
According to statistics from the Century Foundation, expanded unemployment benefits provided 40 million people with much-needed relief in 2020. But now, these Americans could face heavy tax burdens in April if they didn’t realize that unemployment benefits are taxable by the federal government and some states as well.
See: Surprising Tips About Unemployment Tax
Find: Tax filing will be different this year – here’s how to make it easier
Individuals who became unemployed in 2020 are provided with a Form 1099-G (Certain Government Benefits) that shows the amount they received over the year according to the IRS. You’ll need to include this amount on your Form 1040 when filing your taxes this year. Because of the additional benefits of coronavirus relief, your unemployment income may change your tax bracket from what you expected. So, carefully review your tax records to see what percentage of your Adjusted Gross Income you have to pay.
It’s important to note that both state unemployment insurance and supplemental unemployment benefits are taxed by the CARES law, writes CNBC.
See: What are the tax brackets and tax rates for the 2020-2021 period?
Find: Quarantine Your Taxes Don’t Have to Go Insane – our complete guide
In addition to unemployment taxes, you could owe the IRS a “Underpayment Estimated Tax Penalty” if you failed to pay most of your owed taxes for the year prior to April 15th. The IRS says this penalty will be lifted if you:
-
Owe less than $ 1,000 after withholding tax and deductible credits
-
Paid or paid by April 15, 90% of the current year’s taxes
-
An amount equal to 100% of the previous year’s taxes was paid by the reporting date
See: Why You Shouldn’t Think You Can Get a Tax Refund
Find: What Really Happens If You Don’t Pay Your Taxes?
Ways To Reduce The Taxes You Owe This Year
If you are faced with an unexpected tax burden this April, don’t panic. You can qualify for a earned income tax credit of up to $ 6,600 for a household with three or more children who are considered low-income and a child tax credit of up to $ 1,400 per qualifying child, reports CNBC . These credits can help lower your tax burden.
The story goes on
Ordinarily, you could not use Earned Income Credit to reduce taxable unemployment insurance because unemployment benefits are not considered earned income by the IRS. However, this year, under the 2020 Taxpayers Safety and Tax Relief Act, you can use your 2019 EITC earnings amount to calculate your 2020 EITC but if you applied for unemployment in 2020, your 2019 income will help lower your 2020 tax burden through the EITC.
Because tax filings can be more complicated this year, you should speak to a tax professional who understands tax law and can review all of your deductible expenses to help reduce your tax liability.
See: 8 New or Improved Tax Credits and Interruptions for Your 2020 Tax Return
Find: Why This Is The Year You Should Hire An Accountant
Submit early
If your employment situation has changed dramatically during the pandemic, filing your taxes as early as possible so you are prepared for the possibility of a bill. Regardless of when you file, your taxes won’t be due until April 15th. Filing early will give you a clear picture of your finances and how to pay the taxes you owe to avoid penalties.
If you find that you can’t come up with the money, the IRS may be able to grant you a short-term extension, an installment agreement, or a compromise offer. You can negotiate these terms yourself by calling the IRS at 800-829-1040 or using a tax professional to assist you with this process.
See: How to register your taxes early – and get your refund faster
Find: How do your stimulus payments affect your taxes?
Planning for the next year
Unemployed recipients can choose to have federal income tax withheld from unemployment, but many people went unnoticed last year. If you are still accumulating unemployment, you can file Form W-4V to withhold 10% of your benefits and lower your tax burden on your 2021 taxes. Alternatively, you can file quarterly tax payments to minimize your tax burden.
Those who withheld taxes in 2020 could be in better shape by April, though many people took every dollar of their jobless checks to survive. As a last resort, some Americans may plan to use the expected third stimulus checks to pay their tax bill this year.
More from GOBankingRates
This article originally appeared on GOBankingRates.com: Will You Owe Taxes On Your 2020 Unemployment Checks?