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Millions of Americans are going to be in a rude awakening this tax season when they find out they owe the IRS money for unemployment payments.
About 40 million Americans received unemployment insurance benefits last year, according to a recent report from the Left Century Foundation, written by Brian Galle and Elizabeth Pancotti. This represented more than $ 580 billion in benefits. The average beneficiary received a total of about $ 14,000 in unemployment benefits last year.
Still, researchers estimate that only 40% of unemployment benefits in 2020 had taxes withheld. This is important because unemployment benefits are considered taxable income, including the enhanced benefit payments of $ 600 and $ 300 that lawmakers approved last year.
While the unemployed don’t have to pay Social Security or Medicare taxes – typically around a combined rate of 7.65% – you do have to pay federal income taxes and state taxes. in some jurisdictions.
Some states are waiving 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 – levy no income tax.
State unemployment agencies are required to offer the option to withhold 10% of benefits for income tax, but the Century Foundation reports that not all states immediately implemented this option. And many unemployed Americans couldn’t afford a 10% cut in their benefits.
That means millions of workers could owe “thousands of dollars per family” in unemployment benefits on their 2020 taxes, according to Galle and Pancotti.
In addition to regularly enforced unemployment insurance payments, Americans could have received improved weekly unemployment benefits of $ 600 for 17 weeks, plus seven additional weeks of weekly increases of $ 300.
This means that an average worker who was laid off on March 15 in the first wave of stay-at-home orders and who couldn’t find work last year would have received a total of $ 27,315 in severance pay. unemployment, assuming he was eligible for state benefits. and all improved payments, according to the Century Foundation report. All of this is considered taxable income.
If you are still unemployed and you receive benefits, check again that you have chosen the deduction. You should be able to change or stop withholding at any time. To request a deduction, you must complete Form W-4V (the “V” stands for voluntary). Depending on your state, this may be something you can do online through the benefits portal. A flat-rate federal tax rate of 10% of benefits paid can be withheld from each payment, according to the Department of Labor.
You can also go DIY and set up a savings account where you set aside funds to pay for income taxes you might have to pay on unemployment benefits. TurboTax has a W-4 withholding 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 fallout for those who have perceived unemployment for weeks or months during the Covid-19 pandemic. Senator Dick Durbin, D-Ill., And Rep. Cindy Axne, D-Iowa, reintroduced the coronavirus unemployment benefit tax relief law earlier this month, which would exempt the first $ 10,200 from Unemployment benefits from federal income tax in 2020.
Sen. Bernie Sanders, I-Vt., Also supported the unemployment benefit tax rebate and a dozen members of Congress on Thursday sent letters urging Democratic leaders to include a tax exemption in the House’s proposed $ 1.9 trillion relief plan, which is slated for a vote on Friday.
Currently, the legislation does not include such tax exemptions, so it remains to be seen whether Americans who have suffered unemployment in the past year will get a break.
“There is no strong or ethical justification for forcing millions of Americans to scavenge or forgo putting food on the table to pay taxes they shouldn’t owe,” write Galle and Pancotti of the Century Foundation.
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