With COVID-19 still wreaking havoc across the globe, the U.S. economy has been shaken. In the United States a record number of people are or were once unemployed due to COVID-related shutdowns. Fortunately, many of those individuals qualified for standard state unemployment benefits, plus the additional federal funds offered as a result of the CARES Act.
If you received unemployment benefits due to job loss this year, it’s critical to understand how that money impacts your taxes. And obviously, if you are still unemployed, finding out you owe a large tax bill may be even more burdensome. Here is what you need to know about reporting your unemployment income on your tax return.
Why is unemployment income taxable?
Unemployment income is still income. Therefore, by law, it is taxable. According to the IRS, any unemployment income, including the additional unemployment compensation authorized under the CARES Act, must be reported on your 2020 tax return.
That might seem counterintuitive. You might be thinking, if I’m unemployed, shouldn’t I get to receive aid through this transitional time without any strings attached? Yes, but unfortunately, the government still wants its cut of the funds. As far as the IRS is concerned, income is income no matter how you got it.
What does it mean for you?
All unemployment income needs to be reported on your 2020 tax return. However, it’s important to know a few details before you file.
To start, check to see if you participated in voluntary withholding. To have done so, you needed to fill out Form W-4V, which is for Voluntary Withholding Requests. If you filled out that form when you first filed for unemployment, a flat 10 percent withholding of your unemployment benefits likely occurred. That means you’ve already paid 10 percent federal income taxes on your unemployment income.
If you didn’t pay taxes on any of your unemployment income, you will need to pay a lump sum of your income taxes when you file your tax return. If you find yourself in this situation come tax time, but don’t have the funds to pay the entire bill all at once, the IRS offers payment plans to help. We’ll explain more on that later.
How to report your unemployment income
Any unemployment compensation you received in 2020 can be reported under the income section on your federal tax return. Before getting started, you should receive Form 1099-G, Certain Government Payments, is issued by your state’s unemployment office and tells you how much you received in unemployment income. The amount of unemployment income you received is reported in Box 1 and any federal tax withheld is reported in Box 4. State tax withheld is reported in Box 11.
Keep that form for your records, and make sure it matches your own records. That is the dollar amount you need to report on your tax return under the income section. Unemployment income is reported on Schedule 1 of your federal tax return in the Additional Income section. The total amount is then carried forward to your main Form 1040.
Fortunately, if you use TaxAct to file your return, reporting unemployment income is easy. TaxAct walks you through the process and ensures your unemployment income is reported in the correct spot.
Are there special COVID-19 tax exceptions?
At this time, thereContinue reading