When COVID-19 struck, millions of people, unfortunately, lost their jobs. Some were laid off, and others were furloughed. You may be wondering, what’s the difference between being laid off and furloughed? When you are laid off, you have been let go, with no promise of being re-hired in the future. But a furlough means you are temporarily laid off, with the intention of coming back to work in the future when conditions change. When you return, you don’t go through the re-hiring process, and you may be eligible to continue employer benefits such as health insurance during the furlough period, depending on your employer’s policies.
If you were furloughed, you may have received unemployment benefits during that time and may not know if unemployment income is taxable or not. Though the stimulus check you may have received under the CARES Act is not taxable, your unemployment benefits are taxable income you must report on your 2020 income tax return (the one you file in 2021). When you returned to work after your furlough, you began getting a paycheck again and your unemployment benefits probably ended. And of course, those wages from working are taxable income to you, just as in the past. If you were brought back to work with fewer hours and were still eligible for unemployment benefits, also keep in mind that you will have both your employment income and unemployment that is taxable.
So what can you expect when you file your 2020 income tax return? If you have received refunds each year in the past, your refund may be lower for 2020 if you also received other income from working during the year. Here’s why: your tax refund depends on how much you had taken out of your regular paycheck for income tax withholding – if you had more taken out each pay period than the taxes owed, then you get a tax refund when you file your return.
If you received fewer paychecks in 2020 because you were furloughed for part of the year, you had fewer pay periods that withholding was taken out of your check that could result in a smaller refund at tax time.
In addition, if you didn’t have federal taxes withheld from unemployment you may not have had enough withheld to cover taxes at your tax rate. You can voluntarily request to have up to 10% withheld from unemployment by filling out a Form W-4V Voluntary Withholding Request while you are receiving unemployment compensation.
You may be wondering if you earned less in 2020 as a result of unemployment, won’t your tax rates be lower? That depends on how long you were furloughed and how much other income you had during the year.
There are some steps you can take to avoid any surprises at tax-time if you think you didn’t have enough taxes withheld from unemployment while furloughed.
- Adjust your withholding once you are back at work by filling out a new Form W-4 Employee Withholding Certificate. TurboTax W-4 calculator helps you easily estimate your withholding, whether you want a bigger tax refund or more in your paycheck.
- Take credits and deductions that you weren’t eligible for before because your income was more than the income threshold like the Earned Income Tax Credit, the Saver’s Credit, or some education tax benefits.
Don’t worry about knowing these tax laws. TurboTax will ask you simple questions about you and give you the tax deductions and credits you’re eligible for based on your answers. If you have questions you can connect live via one-way video to a TurboTax Live CPA or Enrolled Agent with an average of 15 years experience to get your questions answered. TurboTax Live CPAs and Enrolled Agents are available in English and Spanish, year round to answer your questions and can review, sign, and file your return.