Tax Tips for Unemployment Income If You’ve Been Laid Off or Furloughed

These are unprecedented times and many Americans are struggling financially — unfortunately, unemployment rates have been steadily increasing with Americans filing more than 40 million claims for jobless benefits and the national unemployment rate exceeding 14 percent due to job loss or being furloughed.

To help provide relief for those impacted by coronavirus, the new Coronavirus Aid, Relief, and Economic Security Act (CARES) was passed. The CARES Act expanded who is eligible for unemployment benefits and included a $600 per week unemployment increase for four months.  

If you are receiving unemployment checks, you may be wondering “what are the tax implications of receiving unemployment?” Here’s what you need to know:

How Unemployment Income is Taxed 

Typically, unemployment income is taxable and should be included in your income for the year, especially if you have any other income. Some states also count unemployment benefits as taxable income.

When it’s time to file your taxes, you will receive Form 1099-G which will show the amount of unemployment income you received. Form 1099-G will also show any federal taxes you had taken out of your unemployment pay.

Tax Tips for People Receiving Unemployment Income

  • Adjust your withholdings. Once you are able to find a job, take your unemployment income into account when you are filling out a W-4 withholding certificate for your employer. This is especially important if you didn’t have federal taxes withheld from your unemployment income.
  • Take out federal taxes. Because unemployment income is taxable, one option is to have federal taxes taken out of your unemployment income so there are no surprises when it’s time to file your taxes.  Taxpayers can chose to withhold up to 10% from unemployment benefits by filling out a Form W-4V Voluntary Withholding Request and giving it to the agency that pays their benefits.  If you don’t chose voluntary withholding, or if you don’t withhold enough you can make estimated tax payments.  The first and second quarter federal estimated tax payments were due on July 15, 2020, but the third quarter payment deadline is coming up soon on September 15, 2020, and the fourth quarter estimated tax payment deadline is on January 15, 2021.
  • Self-employed take unemployment into account when paying estimated taxes. Unemployment benefits under the CARES Act are something new for the self-employed.  If you are an independent contractor, side-gigger, or freelancer, keep in mind that unemployment income will be added to your net income from self-employment and will be taxable. When you get ready to pay your estimated quarterly taxes, you can also take your unemployment income into consideration if you don’t have federal taxes withheld from your unemployment. For additional guidance, visit our Self-Employed Coronavirus Relief Center to get up-to-date information, tax advice and tools to help you understand what coronavirus relief means for you.
  • Take advantage of newfound credits and deductions. There are some tax credits and deductions that are based on income, which you may not have been eligible for in the past due to higher income which you may now be eligible for: A few examples are the Earned Income Tax Credit and The Saver’s Credit. In fact, the IRS says 20 percent of people miss both of these tax credits. The Earned Income Tax Credit is a huge credit that is based on your income. If you have lower income in 2020 as a result of lost wages, you may now qualify for EITC, which can be worth over $6,000 for a family with three kids. Additionally, the Saver’s Credit is a tax credit you can take just for contributing to your retirement. If you contributed to retirement in 2020 and now fall within the income thresholds to qualify for the Saver’s Credit due to lost wages, you may see a credit worth up to $1,000 if you’re single or $2,000 for married filing jointly. If you paid someone to take care of your child while you worked anytime during the year or while you looked for work, the Child and Dependent Care Credit is another tax credit that you may see more of if you had a lower income. The percentage of your child care expenses you are able to claim is from 20% to 35% of your expenses up to $3,000 for one child and up to $6,000 for two or more kids depending on your income. If you have lower income you may be able to claim 35% of your expenses ($1,050 for one child and $2,100 for two or more kids) instead of the lower percentage based on higher income.

Don’t worry about knowing these tax rules. 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’re a small business owner or self-employed individual, our Self-Employed Coronavirus Relief Center can provide you with the information you need to better understand the COVID-19 relief available to you. Finally, be sure to keep checking back here for the latest tax information and changes in response to coronavirus.

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