Millions of Americans will have a rude awakening this tax season when they discover they owe money to the IRS for unemployment payments.
About 40 million Americans received unemployment insurance last year, according to a recent report by the Century Foundation, by Brian Galle and Elizabeth Pancotti. This totaled more than $ 580 billion in benefits. The average beneficiary received a total of about $ 14,000 in unemployment benefits last year.
However, researchers estimate that only 40% of unemployment payments in 2020 had taxes withheld. This is important because unemployment benefits are considered taxable income, including the $ 600 and $ 300 enhanced benefit payments that legislators approved last year.
Although those who are unemployed do not have to pay Social Security or Medicare taxes – usually about a combined rate of 7.65% – you do have to pay federal income taxes and state taxes in some jurisdictions.
Some states waive income tax on unemployment checks. If you live in states like California, Montana, New Jersey, Pennsylvania and Virginia, your unemployment benefits are tax-free. In addition, seven states – Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming – do not charge any state income tax.
State unemployment agencies are required to offer the option of withholding 10% of income tax benefits, but the Century Foundation reports that not all states immediately defined this option. And many unemployed Americans could not afford a 10% reduction in their benefits.
This means that millions of workers could owe “thousands of dollars per family” in unemployment benefits in their 2020 taxes, according to Galle and Pancotti.
In addition to regularly applied unemployment insurance payments, Americans could have received improved weekly unemployment benefits of $ 600 for 17 weeks, plus an additional seven weeks of weekly increases of $ 300.
This means that an average worker who was fired on March 15 during the initial wave of requests to stay at home and who was unable to find work last year would have received a total of $ 27,315 in unemployment payments, assuming they were eligible for benefits. state and all increased payments, according to the Century Foundation report. All of this is considered taxable profit.
If you are still unemployed and receiving benefits, double check that you have opted for withholding tax. You must be able to change or stop the retention at any time. To apply for withholding tax, you need to complete the W-4V form (the “V” stands for volunteer). Depending on your state, this may be something you can do online through the benefits portal. A 10% federal flat rate on benefits paid can be withheld from each payment, according to the Department of Labor.
You can also follow the do-it-yourself path and open a savings account, where you set aside funds to pay any income tax that you may owe on unemployment insurance. TurboTax has a W-4 retention calculator that can help you calculate your estimated payment, or you can choose to work with an accountant.
Some lawmakers are working to mitigate the consequences for those who accumulated unemployment for weeks or months during the Covid-19 pandemic. Senator Dick Durbin, D – Ill., And Congresswoman Cindy Axne, D-Iowa, reintroduced the Coronavirus Unemployment Benefits Tax Relief Act earlier this month, which would exempt the first $ 10,200 of unemployment compensation from the federal income in 2020.
Senator Bernie Sanders, I-Vt., Also supported the tax relief on unemployment benefits and a dozen members of Congress sent letters on Thursday asking Democratic leaders to include a tax exemption in the relief package. $ 1.9 trillion proposed by the House, which is scheduled to vote on Friday.
Currently, the legislation does not include any tax exemptions, so it remains to be seen whether Americans who suffered unemployment last year will have a break.
“There is no logical or ethical basis for requiring millions of Americans to search sofa cushions for pennies or to refrain from putting food on the table to pay tax bills they shouldn’t owe,” wrote Century Foundation’s Galle and Pancotti .
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