Yes.

Unemployment compensation, particularly jobless benefits, is considered taxable income for federal income tax purposes and for some states too. As of the date of this posting, the following 15 states do not consider unemployment benefits taxable: Alabama, Alaska, California, Florida, Montana, Nevada, New Hampshire, New Jersey, Pennsylvania, South Dakota, Tennessee, Texas, Virginia, Washington, and Wyoming.

As part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the Pandemic Unemployment Assistance (PUA) program expanded eligibility for unemployment benefits to include millions of people who lost their jobs or were unable to work as a direct result of COVID19. Independent contractors, self-employed individuals, and others became eligible for unemployment compensation under the program and received unemployment benefits from their state plus an additional $600 per week through July 31, 2020.

You will receive Form 1099-G, Certain Government Payments, by January 31, 2021 reporting the amount paid to you in Box 1 for year 2020 and the amount of federal tax withheld, if any, in Box 4. When completing your federal income tax return, the amount in Box 1 is included in “gross income,” which is one of the inputs to calculate your taxable income.

Take Action:

• You can choose to have 10% withheld for federal taxes by completing Form W-4 V, Voluntary Withholding Request. Submit the form to the state agency that pays your unemployment, not the IRS.

• Visit the IRS website to determine if you will owe tax on your unemployment compensation. Are Payments I receive for Being Unemployed Taxable?

• By taking these steps, you can avoid a surprise balance due when filing your 2020 taxes. Tax Planning is important!

• Take advantage of newfound credits and deductions. Depending on your income level, losing your job may open the door to some additional tax breaks like the following:

  • Earned Income Tax Credit. The amount of the credit increases the more children you have. A taxpayer with three or more qualifying children is eligible for a maximum credit of $6,660 in 2020.

  • Child Tax Credit. A 2020 tax credit of up to $2,000 for qualifying children under the age of 17.

  • Child and Dependent Care Credit. Amounts you pay someone to care for your child so you can work or look for work may be deductible, depending on your level of 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.

  • Savers Credit. Credit of up to $1,000 ($2,000 for couples) for retirement plan contributions by low-income taxpayers. 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.

  • The Health Coverage Tax Credit (HCTC). This credit is available through 2020 for a select group of unemployed people. If you lost your job due to trade with foreign countries and are receiving Trade Adjustment Assistance benefits, you may be able to claim this credit, which covers 72.5% of your health insurance premiums.

Want help navigating your options? Contact us.