Jobless workers may face a surprise tax bill or smaller refund
With tens of millions of Americans dependent on unemployment benefits during the pandemic, many may face a tax burden or a lower refund this season if they haven't withheld enough over the year.
Unemployment benefits are taxable and must appear on your 2020 taxes, on both federal and some state income. They are considered earned income and are taxed in the same way.
Read more: Do you have to pay taxes on unemployment benefits?
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"People on unemployment benefits are cashless and don't put money aside for unemployment income," Lewis Taub, accountant and New York director of tax services at Berkowitz Pollack Brant Advisors, told Yahoo Money. "They are hit unexpectedly hard when they actually have to pay their tax bill."
Withholding tax on your unemployment benefit is voluntary. Recipients can withhold a lump sum of 10% of their unemployment benefit. If they have not chosen to withhold taxes, they would have to pay them immediately when filing their taxes. Even if they hold back, they may have to pay more taxes.
35 states are expected to collect additional state income taxes totaling $ 12.7 billion from unemployment benefits. Nine states have no state income tax, while another six exempt unemployment benefits from their income tax. Graphic: David Foster / Yahoo Finance
Unemployment benefits are subject to income tax, but not to wage tax like the paycheck of your workplace.
While you may have to pay federal income tax on your unemployment benefits, you can avoid paying state income taxes based on where you live. Nine states - including Florida, Nevada, and Texas - don't have income taxes, so you would only pay federal taxes on your unemployment benefits. In addition, California, Montana, New Jersey, Pennsylvania, Virginia and Wisconsin exempt unemployment benefits from their state income taxes.
Read More: How To Use Your Tax Refund In 2021
The remaining 35 states and the District of Columbia are expected to collect a total of $ 12.7 billion in additional state income taxes from unemployment benefits by 2020 and through Feb. 13, according to a tax foundation analysis. The federal government would levy $ 65 billion in income taxes over the same period.
"Still a refund"
During the pandemic last year, not only were millions of Americans dependent on unemployment benefits, but the programs were more generous - meaning their tax burden could be higher than usual. Access to unemployment benefits was extended to the self-employed and contractors under the Pandemic Unemployment Assistance (PUA) program, and unemployed people received additional weekly benefits in addition to their regular benefits at different stages of the pandemic.
Even if you received unemployment benefits, it doesn't mean you necessarily owe the IRS. However, this could mean you will get a lower refund than in previous years.
Read more: Tax Tips For Freelancers 2021: 12 Smart Ways To Submit
"It's still very, very early in the season for us, but we're finding that even people with unemployment income are still getting reimbursements," said Kathy Pickering, chief tax officer of H&R Block, told Yahoo Money. "It may not be as big as last year, but they are still getting a refund."
Individuals who received unemployment benefits in 2020 should obtain a Form 1099-G from their state so that they can properly complete their taxes. Many states do not post the form, so taxpayers should go to their state website to access the form.
The Yahoo Money sister site Cashay has a weekly newsletter.
Denitsa is a writer for Yahoo Finance and Cashay, a new personal finance website. Follow her on Twitter @denitsa_tsekova.
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