As unemployment hits record highs due to the widespread shutdowns prompted by the COVID-19 pandemic, more than 36 million Americans have filed unemployment compensation claims. What many people do not realize is that unemployment benefits – both those available through the state and the additional $600 per week available through July 31 from the federal government under the CARES Act – are taxable.
If you are aware of the liability, there are steps you can take to avoid a surprise on your tax bill next year.
Unemployment insurance benefits are taxable income
Unemployment payments increase your tax burden. No matter where you are in the United States, your unemployment checks are taxable at the federal level. The state will send an IRS Form 1099-G showing the total you received in unemployment insurance benefits received during the preceding year. Unless you account for the taxes ahead of time, you will need to pay them all at once, when they are due.
Avoid a COVID unemployment tax shock
It is possible to avoid surprises on your tax bill on unemployment benefits by taking steps to save and prepare for the inevitable in different ways. For example:
- Withholding – You can elect to have federal and/or state taxes deducted from your benefit payments. To do so, you must first sign and return a W-4 form. If you are married, you can also ask your spouse to adjust their withholdings to reflect the liability.
- Estimated payments -You can make quarterly estimated tax payments to avoid owing the amount in one lump sum. Self-employed individuals, who have generally been ineligible for unemployment but may receive the benefits in certain circumstances under the CARES Act, are typically already required to pay quarterly estimated taxes. Baltimore residents can check the website of the Comptroller of Maryland to determine their estimated payment.
- Set tax funds aside – With a little self-discipline, you can calculate the amount you will owe in taxes and segregate the funds that will go toward your tax payment when the deadline approaches.
There is little doubt that 2020 taxes will be a challenge considering the continuing changes to federal and state laws in response to the COVID pandemic. To be sure you are acting on the most recent legal advice, speak with a Baltimore tax attorney at Rosenberg Martin Greenberg. Our team is committed to providing current, informed counsel to those in the mid-Atlantic region.