Understanding Taxes Owed On Unemployment Compensation in 2020
Unemployment Compensation
The United States unemployment rate peaked in April 2020 at 14.9% a height not achieved since we started keeping trap in 1948 before declining to a still-high 7.6% in December to close out the year.
That represents many Americans who will find themselves fighting with the tax owed on unemployment checks when the tax season gets here for 2021 and 2020 tax filing.
Those unemployment benefits that many taxpayers received for months are taxable income. That includes the extra $600 per week given by the U.S. government to aid folks with the coronavirus pandemic.
How Taxes on Unemployment Benefits Are Done
Unemployment payments are money to you, just like your work paycheck. Soon you will get in the mail Form 1099-G, showing the benefits you earned. The IRS will also get a copy too.
Unemployment compensation has its own place on Schedule 1, which is on your 1040 tax return.
If you understood the money was taxable, you requested to have income tax taken out from your unemployment benefits. You need to put your unemployment benefits on your income tax return even if you do not have a Form 1099-G.
Affect on Your Other Tax Issues
Unemployment compensation is taxable, but getting it can affect some tax credits you might be qualified for and are counting on to reduce the 2020 taxes due.
Another thing to consider is if you usually get the Earned Income Credit (EIC) each year. Unemployment benefits are not considered ‘earned income, and they do affect your adjusted gross income (AGI), which is used to figure the EIC.”
FICA Taxes vs. Income Taxes
But there is good news. Unemployment benefit is not connected to FICA Payments, the Social Security and Medicare taxes that are usually deducted from your check. You’d catch a break if you received unemployment payments through the year.
Federal Taxation vs. State
You will also get some assistance if you happen to live in a state that doesn’t tax unemployment compensations unless you owe tax on your money to either the IRS or your state. As of 2020, the states that do not tax unemployment compensations are:
- Alabama
- California
- Montana
- New Jersey
- Pennsylvania
- Virginia3
These seven states do not tax any income at all, so you’ll catch a break here as well:
- Alaska
- Florida
- Nevada
- South Dakota
- Texas
- Washington
- Wyoming3
New Hampshire and Tennessee only tax investment income, so you will do better in these states. And 2 more states, Indiana and Wisconsin, tax only a small amount of your benefits. Some towns and cities have local income taxes that you will have to deal with.
Check out this video “Are Unemployment Benefits Taxable?”
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Category: Taxes
