Tax tips for unemployment income if you’ve been laid off or furloughed

While unemployment rates have fallen in America with an estimated 6.3 million jobless claims and a national unemployment rate of just under 4% due to job loss or furlough , these are still unprecedented times and many Americans are struggling financially.

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To help relieve those affected by the coronavirus, several coronavirus relief plans have also expanded unemployment benefits in 2020 and 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 2020, expanded those eligible for unemployment benefits and included $600 per increase in weekly unemployment for four months.
  • Coronavirus Response and Relief Supplemental Appropriations Act of 2021 – On December 27, 2020, unemployment benefits were extended for the second time under the Coronavirus Response and Relief Supplemental Appropriations Act of 2021. The bill increased unemployment benefits of $300 per week and extended benefits through March 14, 2021. The bill also expanded Pandemic Unemployment Assistance (PUA), which extends unemployment to those not generally eligible for unemployment benefits. regular unemployment insurance benefits. This means that the self-employed, freelancers and secondary musicians will continue to be eligible for unemployment benefits.
  • US bailout – The US bailout was the third coronavirus relief package that expanded unemployment and provided retroactive tax relief. The new US bailout provided a $300 federal increase to weekly unemployment payments and extended two key pandemic unemployment benefit programs through September 6, 2021.

If you receive unemployment checks, you may be wondering “what are the tax implications of unemployment?” Here’s what you need to know:

How unemployment income is taxed

Generally, unemployment income is taxable and must be included in your income for the year, especially if you have other income. Some states also consider unemployment benefits as taxable income.

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However, under the US bailout, the first $10,200 of federal unemployment income was tax-free for households with incomes below $150,000. This provision would be retroactive ONLY to the 2020 tax year (the taxes you likely filed in 2021). The bill also extended Pandemic Unemployment Assistance (PUA), which extended unemployment to self-employed workers, freelancers and side giggers.

When you 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 withheld from your unemployment benefit.

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Tax advice for people receiving unemployment income

  • Adjust your deductions. Once you are able to find a job, consider your unemployment income when filing a W-4 withholding certificate for your employer. This is especially important if you had no federal tax withheld from your unemployment income.
  • Take out the federal taxes. Since unemployment income is taxable, one option is to deduct federal taxes from your unemployment income so that there are no surprises when you file your taxes. Taxpayers can elect to withhold up to 10% of unemployment benefits by completing a Voluntary Withholding Request Form W-4V and delivering it to the agency paying their benefits. If you do not elect voluntary withholding, or if you do not withhold enough, you can make estimated tax payments.
  • The self-employed take unemployment into account when paying estimated taxes. If you are an independent contractor, freelancer, or freelancer, keep in mind that unemployment earnings will be added to your net self-employment income and may be taxable. When you get ready to pay your estimated quarterly taxes, you can also consider your unemployment income if you don’t have any federal taxes withheld from your unemployment.
  • Take advantage of new credits and deductions. There are certain income-based tax credits and deductions, which you may not have been entitled to in the past due to higher income which you may now be entitled to: some examples are the tax credit on earned income and savings credit. In fact, the IRS reports that 20% of people miss both of these tax credits.
  • The earned income tax credit is a huge credit based on your income. If you had a lower income in 2021 due to lost wages, you can now qualify for the EITC, which can be worth over $6,000 for a family with three children.
  • The savings credit is a tax credit that you can only benefit from to contribute to your retirement. If you made retirement contributions in 2021 and are now within the income thresholds to qualify for the savings credit due to lost wages, you may see a credit worth up to $1,000 if you are single or $2,000 if you are married and filing jointly.
  • The Child and Dependent Care Credit is a credit you can get if you paid someone to care for your child while you were working any time of the year or while you were looking for work. Another tax credit that you may see more of if you had a lower income is the Child and Dependent Care Credit. For the 2021 tax year only, the Child and Dependent Care Credit has been extended in several ways as part of the US bailout. The child care expense percentage and thresholds have changed, so you can get a credit of up to 50% of $8,000 ($4,000) in child care expenses for a child under 13 years old, an incapacitated spouse or parent or another dependent so you can work and up to 50% of $16,000 of expenses ($8,000) for families with two or more dependents.

Don’t worry about these tax rules – TurboTax will ask you simple questions about you and tell you what tax deductions and credits you are entitled to based on your answers.

Although unemployment can be frightening and overwhelming, you don’t have to face it alone. We’re here to help and advise you on everything from managing your day-to-day finances to understanding what it means for your taxes, and you can find out more about unemployment benefits, unemployment insurance and unemployment eligibility at the TurboTax Unemployment Center.