As a result of the recent Covid-19 Pandemic, we experienced a staggering increase in unemployment unlike anything in recent history. This led to a record-setting number of families and individuals relying on government assistance to pay bills and get by. With high numbers of first-time recipients receiving government aid, many are asking how this government money will be taxed on their next return.
Are Unemployment Benefits Subject to Being Taxed?
Yes, unemployment benefits alongside most forms of government aid are subject to Federal Taxes. State taxation of unemployment benefits, however, vary from state to state. According to the Tax Foundation: “Of the 41 states that tax wage income, five states completely exempt unemployment benefits from tax (California, New Jersey, Oregon, Pennsylvania, and Virginia).”
What is The Best Way to Payoff Taxes on Income From Unemployment Benefits?
There are three options on how to pay off what’s owed in taxes from unemployment income. The safest and most commonly used method is to fill out a Form W-4V. This form allows you to withhold 10% of the payment received to pay off federal income taxes as the money comes in. If you are short for cash and would rather receive a larger sum of the money upfront, you can choose to pay estimated taxes quarterly or set aside money to pay off the entirety of what is owed next time tax season comes around. Paying estimated taxes quarterly is mainly done by companies and self-employed individuals who have a dedicated process for keeping books and managing finances. The latter two options of the three come with risk, failure to withhold and pay off what is due in taxes can lead to additional penalties from the IRS - or a smaller refund. If not approached cautiously, these options may place you and your family in an additional financial strain.
Can Unemployment Income Affect Qualifications for Tax Credit?
Yes, households that qualified for Earned Income Credit prior to receiving the stimulus unemployment aid (with the additional $600 per unemployment check) may now be ineligible for the said tax credit.
“The United States federal earned income tax credit or earned income credit is a refundable tax credit for low - to moderate-income working individuals and couples, particularly those with children.”This, alongside several other credit qualifications are important to check as a drastic change in income can play a big role in the amount you owe to the IRS. It is always best to check with a qualified professional on the best approach when filing your taxes. Given the changes we’ve seen this past year, it’s critical for taxpayers to connect with a licensed CPA or EA to get the help you need when filing taxes. You can visit app.taxfyle.com to create an account and find a remote professional to help you get started on your taxes!