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Tax Tips for Unemployment Income If You’ve Been Laid Off or Furloughed

Tax News Unemployment benefits

These are unprecedented times and many Americans are struggling financially — unfortunately, unemployment rates have been steadily increasing with Americans filing more than 40 million claims for jobless benefits and the national unemployment rate exceeding 14 percent due to job loss or being furloughed.

To help provide relief for those impacted by coronavirus there are several coronavirus relief plans that also expanded unemployment benefits. 

  • 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 PlanThe American Rescue Plan is the third coronavirus relief plan that expanded unemployment and provided retroactive tax relief. The new American Rescue Plan provides a $300 federal boost to weekly jobless payments and extended two key pandemic unemployment benefits programs through September 6, 2021.

If you received unemployment benefits in tax year 2020, learn what the American Rescue Plan means for you, and make sure you get every dollar you deserve.

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 will be tax-free for households with income less than $150,000. This provision would be retroactive to tax year 2020 (the taxes you file in 2021).

The bill also extended the Pandemic Unemployment Assistance (PUA), which continues to expand 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. Unemployment benefits under coronavirus relief is something new for the self-employed.  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. For additional guidance, visit our Self-Employed Coronavirus Relief Center to get up-to-date information, tax advice and tools to help you understand what coronavirus relief means for you.
  • 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 have lower income in 2020 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. Under the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 there is a special lookback rule that will allow lower income individuals to use their earned income from 2019 to determine their Earned Income Tax Credit and the refundable portion of the Child Tax Credit in 2020, since their lower 2020 income could reduce the amount they are eligible for.
  • Saver’s Credit is a tax credit you can take just for contributing to your retirement. If you contributed to retirement in 2020 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. The percentage of your child care expenses you are able to claim is from 20% to 35% of your expenses up to $3,000 for one child and up to $6,000 for two or more kids depending on your income. If you have lower income you may be able to claim 35% of your expenses ($1,050 for one child and $2,100 for two or more kids) instead of the lower percentage based on higher income.

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 during this COVID-19 pandemic at the TurboTax Unemployment Center. Finally, be sure to keep checking back here for the latest tax information and changes in response to coronavirus.

Comments (5) Leave your comment

  1. I filed our 2020 tax return already. Will TurboTax let us know what to do to take advantage of the non taxable unemployment amount and child credit?
    Thanks

    1. Hi,

      If you’ve already filed your 2020 return, hang tight. The IRS will provide guidance on how you can claim these additional unemployment benefits soon.

      You don’t have to do anything to get the payments for the expanded Child Tax Credit. Please note that the Child Tax Credit is for tax year 2021 (the ones you typically file in 2022). The IRS does plan to advance payment of the Child Tax Credit if you meet the eligibility requirements prior to filing your 2021 taxes in 2022.

      Check back with the blog for updates.

      I hope this helps.
      Best,
      Katharina Reekmans, EA

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