It’s everyone’s favorite time of year. Tax season! For many, 2020 was a unique year that brought some unpredicted changes. If one of those changes was a period of unemployment, you’re not alone! Here are a few tips on how to navigate what you may owe Uncle Sam this year.
Unemployment benefits are taxable income just the same as an earned paycheck. These funds are free from Social Security and Medicare tax, but you do have to report them on your income tax report. In the coming weeks, keep an eye on the mail or your inbox for Form 1099-G. This form will indicate the full amount of benefits you received in 2020, as well as any withholdings you may have taken.
The short answer is, it depends. When you first filed, you may have arranged to have income tax withheld from your checks each week. One thing you may have overlooked is the 10% cap on federal withholdings. If you earned additional income later on in the year (hopefully got a new job), that 10% may not correlate with your actual tax rate. Use the IRS tax withholding calculator to estimate your rate.
This is handled differently from state to state. Michigan unemployment income is subject to both state and federal tax. However, Florida does not collect state tax on unemployment (One more reason to move to Florida!).
In March 2020, the CARES Act was passed to provide relief funds for the Coronavirus pandemic. This included an additional $600 per week for out-of-work Americans. This additional $600 is subject to income tax just like normal unemployment. Sidenote: Stimulus checks that are part of the CARES Act are not subject to income taxes.
If you are still on the hunt for a new job, funds are probably still a tad tight. Even though you do have to pay taxes this year, there are options. You can elect to make quarterly estimated tax payments that may help ease the burden right now if you don’t have the funds. A W-4 form will be necessary if you take this route. Another option is to ask about an installment agreement. To do this, you can fill out Form 9465 with the IRS.
The good news is, you still have a few more months to sort out the details. If you are in a different situation than you expected, there is time to save a bit before that April 15 deadline.
Lake Michigan Credit Union and its representatives do not provide tax or legal advice. Your tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.