While unemployment relief measures are crucial for many people, it should come as no surprise that you must consider the money received with the enhanced unemployment benefit when paying your taxes.
Thanks to the CARES Act, unemployment insurance was increased with weekly paychecks of $ 600 and coverage was extended for an additional 13 weeks. The original plan expired on July 26th and it remains to be seen whether this benefit will be renewed in the new relief bill and what the amount of aid would be if it is approved.
If you are one of the millions of people who collected the extra bonus, the Internal Revenue Service (IRS) considers these resources as income and when you file your return next year, you will have to claim your unemployment checks as income that will be taxed with the ordinary rate.
If this was your case, you will receive a Form 1099-G, which shows how much money came from your unemployment benefits. Whether you received extra money through the CARES Act or collected it prior to it, those resources are considered taxable income. When paying state income taxes, you may also have to pay state and federal tax obligations.
Only the states of California, Montana, New Jersey, Pennsylvania, and Virginia waived unemployment income taxes.
How to avoid getting a large tax bill?
Next year you will have to pay your taxes on unemployment benefits. Here are some options to do it:
1. Pay taxes next year
If you currently need to use all of your insurance money, you can pay your taxes next year when you file your tax return.
If you can afford it, ask to make quarterly payments or sign up for a plan that automatically takes your taxes away.
2. Estimated quarterly payments
If you choose this measure, you will distribute the tax burden that you owe every three months. Since they are estimated taxes, you could end up paying very little and get a tax penalty. On the other hand, getting an estimate and paying a little more would lead to expecting a tax refund later.
3. Automatic retention
If you want your unemployment checks to be taxed as a regular paycheck, you can complete a W-4V form. This allows you to collect taxes in advance and avoid a large tax bill next year. Keep in mind that if you need to maximize as much money as possible this option reduces the resources you could have at the moment.