This year, due to the Covid-19 pandemic tax season dates were modified. If you asked for an extension to file your taxes, the deadline is in a few days, but if you haven’t paid your taxes you should be doing so as soon as possible, to avoid penalties. Are unemployment benefits taxable income?
While aid benefits are crucial for many people, it should come as no surprise that you should consider the money received with the enhanced unemployment benefit when paying your taxes.
The COVID-19 pandemic has put the economy into recession and millions of Americans have lost their jobs. Although they did not receive a salary during the pandemic, they were able to cover some of their basic expenses thanks to unemployment insurance.
Thanks to the CARES Act, unemployment insurance was increased with weekly paychecks of $ 600, $300, and coverage was extended for an additional 13 weeks.
The sad news is that you will have to pay taxes on the money received as an aid during the fiscal year 2020, but, if now you need all the money from unemployment insurance you will be able to pay your taxes next year.
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 its entry into force, those resources are considered taxable income. When paying state income taxes, you may also have to pay state and federal tax obligations.
There are some places where your unemployment benefit checks are exempt from tax. The states of California, Montana, New Jersey, Pennsylvania, and Virginia waived unemployment income taxes.
If you don’t live in any of these places, however, next year you will have to pay your taxes on unemployment benefits.
Here are some options to do it:
1.- 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. Conversely, getting an estimate and paying a little more would lead to expecting a tax refund later.
2. 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.
3.- Pay taxes next year
If you needed to use all of your insurance money, you can pay your taxes next year when you file your tax return.