Unemployment Benefits Are Taxable

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Don’t Get Caught Off-guard in 2021

By Austin Coyan, CPA, CFE

During the recent COVID-19 pandemic, millions of Americans applied for and received, unemployment benefits. These benefits included:

  • The normal amount payable by your state’s designated unemployment fund, and
  • Additional federal funds from the CARES Act.

Unemployment benefits are crucial for laid off and furloughed employees; however, these benefits do come with strings attached.  If you received unemployment funds in 2020, they are taxable and must be included on your 2020 tax return that you will file in 2021.

Unemployment benefits are considered taxable income by the IRS since the funds replace income that would have typically been reported on your W-2. Since unemployment benefits do not have federal or state taxes withheld when paid out, it is possible you may have a large balance due when you file your next return.

 

Tax Planning is Key

Some taxpayers may have accessed alternative funding sources such as retirement funds or the sale of investments in the midst of COVID-19 that carry their own tax impact. Make sure you review how your 2020 taxes are shaping up with everything that is going on.  Proper tax planning with your Adams Brown advisor is key. 

Federal Withholding of Unemployment Benefits

You can have a flat 10% of federal taxes withheld from your unemployment benefits by completing a Form W-4V (Voluntary Withholding Request) and submitting this to the state agency that manages your unemployment benefits. Each state may have their own withholding form to complete for state withholding on unemployment benefits. If you elect not to withhold from your unemployment benefits, you can adjust your quarterly estimates or pay the balance due with your next tax return. If you do not pay in enough during the year, you may be penalized for underpaying your estimated taxes.

For any taxpayer that receives unemployment benefits during 2020, you will receive a Form 1099-G showing the amount of payments to be reported on your tax return.

If you have any questions about how unemployment benefits could impact your tax position for 2020 or you would like to start a tax planning discussion, please reach out to your Adams Brown advisor.