While unemployment rates have decreased in America with an estimated 6.3 million claims for jobless benefits and the national unemployment rate just under 4 percent due to job loss or being furloughed, these are still unprecedented times and many Americans are struggling financially
To help provide relief for those impacted by coronavirus there were several coronavirus relief plans that also expanded unemployment benefits in 2020 and in 2021.
- Coronavirus Aid, Relief, and Economic Security Act (CARES) – The first coronavirus relief plan, the Coronavirus Aid, Relief, and Economic Security Act (CARES) passed in March of 2020, expanded who is eligible for unemployment benefits and included a $600 per week unemployment increase for four months.
- Coronavirus Response and Relief Supplemental Appropriations Act of 2021 – On December 27, 2020, unemployment benefits were expanded for the second time under the Coronavirus Response and Relief Supplemental Appropriations Act of 2021. The bill increased unemployment payments by $300 per week and extended the benefits until March 14, 2021. The bill also extended the Pandemic Unemployment Assistance (PUA), which expands unemployment to those who are not usually eligible for regular unemployment insurance benefits. This means that self-employed, freelancers, and side giggers will continue to be eligible for unemployment benefits.
- American Rescue Plan – The American Rescue Plan was the third coronavirus relief plan that expanded unemployment and provided retroactive tax relief. The new American Rescue Plan provided a $300 federal boost to weekly jobless payments and extended two key pandemic unemployment benefits programs through September 6, 2021.
If you are receiving unemployment checks, you may be wondering “what are the tax implications of receiving unemployment?” Here’s what you need to know:
How Unemployment Income is Taxed
Typically, unemployment income is taxable and should be included in your income for the year, especially if you have any other income. Some states also count unemployment benefits as taxable income.
However, under the American Rescue Plan, the first $10,200 of federal unemployment income was tax-free for households with income less than $150,000. This provision would be retroactive ONLY for tax year 2020 (the taxes you likely filed in 2021).The bill also extended the Pandemic Unemployment Assistance (PUA), which expanded unemployment to self-employed, freelancers, and side giggers.
When it’s time to file your taxes, you will receive Form 1099-G which will show the amount of unemployment income you received. Form 1099-G will also show any federal taxes you had taken out of your unemployment pay.
Tax Tips for People Receiving Unemployment Income
- Adjust your withholdings. Once you are able to find a job, take your unemployment income into account when you are filling out a W-4 withholding certificate for your employer. This is especially important if you didn’t have federal taxes withheld from your unemployment income.
- Take out federal taxes. Because unemployment income is taxable, one option is to have federal taxes taken out of your unemployment income so there are no surprises when it’s time to file your taxes. Taxpayers can choose to withhold up to 10% from unemployment benefits by filling out a Form W-4V Voluntary Withholding Request and giving it to the agency that pays their benefits. If you don’t choose voluntary withholding, or if you don’t withhold enough you can make estimated tax payments.
- Self-employed take unemployment into account when paying estimated taxes. If you are an independent contractor, side-gigger, or freelancer, keep in mind that unemployment income will be added to your net income from self-employment and may be taxable. When you get ready to pay your estimated quarterly taxes, you can also take your unemployment income into consideration if you don’t have federal taxes withheld from your unemployment.
- Take advantage of newfound credits and deductions. There are some tax credits and deductions that are based on income, which you may not have been eligible for in the past due to higher income which you may now be eligible for: A few examples are the Earned Income Tax Credit and The Saver’s Credit. In fact, the IRS says 20 percent of people miss both of these tax credits.
- Earned Income Tax Credit is a huge credit that is based on your income. If you had lower income in 2021 as a result of lost wages, you may now qualify for EITC, which can be worth over $6,000 for a family with three kids.
- Saver’s Credit is a tax credit you can take just for contributing to your retirement. If you contributed to retirement in 2021 and now fall within the income thresholds to qualify for the Saver’s Credit due to lost wages, you may see a credit worth up to $1,000 if you’re single or $2,000 for married filing jointly.
- Child and Dependent Care Credit is a credit you may be able to take if you paid someone to take care of your child while you worked anytime during the year or while you looked for work, the Child and Dependent Care Credit is another tax credit that you may see more of if you had a lower income. For the 2021 tax year only, the Child and Dependent Care Credit expanded in several ways under the American Rescue Plan. The percentage and the child care expense thresholds changed, so you can get a credit up to 50% of $8,000 ($4,000) in child care expenses for one child under 13, an incapacitated spouse or parent, or another dependent so that you can work and up to 50% of $16,000 in expenses ($8,000) for families with two or more dependents.
Don’t worry about knowing these tax rules — TurboTax will ask you simple questions about you and give you the tax deductions and credits you’re eligible for based on your answers.
While unemployment can be scary and overwhelming, you don’t need to navigate it alone. We are here with help and advice on everything from managing your day-to-day finances to understanding what this means for your taxes, and you can learn more about unemployment benefits, unemployment insurance and unemployment eligibility at the TurboTax Unemployment Center.