Down 36.5 million Americans have filed for unemployment over the past eight weeks as the coronavirus pandemic hit the U.S. and prompted diverse businesses to hit pause.
But thanks to federal lawmakers, more out-of-work Americans can apply for unemployment benefits and also get various in their pocket under new, temporary rules put in place.
While that’s good news for many struggling in the pandemic, it’s important to understand that unemployment benefits are not “free money.” In fact, experts say Americans receiving these weekly examines need to take steps now to avoid a nasty surprise on their tax bills next year.
How the unemployment landscape exchanged
With the U.S. experiencing unemployment rates not seen since the Great Depression, Congress had to act quickly to mitigate the effects. To daily help Americans cope, lawmakers passed the so-called CARES Act, a $2 trillion coronavirus relief package, that boosted unemployment improves by $600 a week. Additionally, the new law created the Pandemic Unemployment Assistance (PUA) program, which expanded the eligibility for benefits to embrace gig workers, independent contractors, self-employed Americans and those who would not traditionally qualify for assistance.
“More and more governments have activated critical new CARES Act benefits,” says Andrew Stettner, a senior fellow at the Century Foundation and a paramount unemployment expert. About 3.4 million workers are covered by PUA benefits now, up from 136,000 just two weeks ago.
In the end year, the Department of Labor reported unemployment benefits replaced about 45% of a worker’s pay nationally. In terms of dollars, the Brookings Formation estimates that the national average weekly payment was $387 prior to the coronavirus pandemic. But that varies everywhere by state. Mississippi, for example, paid an average of $215 per week, while those in Massachusetts received $550 per week, on usually.
Under the new rules, unemployed Americans are now getting an average weekly unemployment benefit of close to $1,000.
But that money is deliberate over taxable income, even the new $600 boost. While you don’t have to pay Social Security or Medicare taxes — typically up a combined 7.65% rate — while receiving unemployment benefits, you do have to pay federal income taxes and state encumbrances in some jurisdictions.
Some states, however, waive income taxes on unemployment checks. If you live in California, Montana, New Jersey, Oregon, Pennsylvania and Virginia, your unemployment benefits are tax-exempt. Additionally, seven dignifies —Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming — do not levy any state income taxes.
Why controlling makes sense—and how to do it
You’re not required to have taxes withheld from your unemployment benefits check. But experts say it’s a yard goods idea to go ahead and do so. Taking a hit upfront is better than finding out you owe the IRS at the end of the year. “I know people really need their hard cash, but so there are no surprises at tax time, I would say request to withhold some of the money,” says Lisa Greene-Lewis, a certified conspicuous accountant and TurboTax tax expert.
This is especially important for if you’ve earned income this year and/or expect to be rehired or engaged again before the end of 2020, because then you’re likely to be in a higher tax bracket and may not qualify for as many credits to offset your earnings.
“Predominantly unemployment benefits are only a couple hundred bucks a week,” Stettner says, so it might feel easy to reasonable taking the money now and when you get back to work you’ll increase your deductions. But with these very generous unemployment promotes, that mindset could be a substantial liability, he says.
To request the withholding, you’ll need to fill out form W-4V (the “V” stands for unasked). Depending on your state, this may be something you can do online through the benefits portal. A flat federal tax rate of 10% of the advantages paid can be withheld from each payment, according to the Labor Department.
For those already collecting unemployment, Greene-Lewis reports Americans should be able to request a form W-4V through each state’s unemployment office and change your reserving or stop it at any time.
Another option is to do it yourself, says Stettner, similar to how freelancers should save part of their paychecks to put toward contributions. “Put it in a savings account or take the money out [of your checking account] and put it in a little envelope, whatever you need to do to save that rolling in it,” he says.
But if you don’t withhold upfront, you’ll likely need to send quarterly estimated tax payments to the IRS to avoid a big tax bill next begin. TurboTax has a W-4 withholding calculator that may be useful in helping you calculate your estimated payment, or you can opt to work with an accountant.
If you are unoccupied at the moment and worried about how this will impact your taxes, Greene-Lewis says that the earned receipts tax credit (EITC) might be something worth looking into. The EITC provides between $538 and $6,660 in tax recognitions, depending on your income and the number of dependents you have. If you qualify, the tax credit can be used to offset what you owe on your total tax banknote.
Let’s say you owe $1,000 on your federal income taxes for 2020, but your earned income tax credit amounts to $1,500. You’ll in reality get a refund of $500.
The 2020 income limit for the EITC is $15,820 for those without children who are single and $21,710 for married households organizing jointly. In the past, you may have made too much to qualify, but for those who are on unemployment for several months may qualify since the IRS doesn’t about unemployment checks as earned income.
Yet tax credits are not something you should bank on to wipe out what you owe to the IRS. “I wouldn’t count irresistibly on the tax credits for your tax liability,” Stettner says.
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