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This article was fact-checked by our editors and CPA Janet Murphy, senior product specialist with Credit Karma Tax®. It has been updated for the 2019 tax year.
If you’re counting on unemployment to help you stay afloat financially through the coronavirus crisis, next year’s tax bill may not be front-of-mind for you right now.
But it’s important to understand that even though federal and many state governments have expanded unemployment programs in response to the pandemic, unemployment compensation is generally taxable.
- How COVID-19 has affected unemployment benefits
- Your tax responsibilities when you’re unemployed
- Paying taxes when you are unemployed
- Tax deductions and credits when you’re unemployed
- Finding some help
- If you can’t pay your taxes on time
How COVID-19 has affected unemployment benefits
The federal stimulus package includes several provisions aimed at making unemployment benefits more accessible and helpful to Americans struggling financially because of the pandemic. They include …
- Radically broadening the range of people who can qualify for unemployment, including self-employed individuals
- Extending to 39 weeks the total time that someone can receive unemployment (most state programs previously maxed at 26 weeks)
- Allowing states to waive the usual waiting period to receive benefits
- Creating an additional $600 per-week Federal Pandemic Unemployment Compensation amount. Note that while the start date for this benefit is state-specific, it expires on July 31, 2020.
You can find information on unemployment benefit changes due to COVID-19 as well as links to each state’s unemployment programs on the U.S. Department of Labor’s CareerOneStop website.
State and federal efforts to expand unemployment benefits aside, unemployment compensation is generally still subject to income tax. And if you don’t pay enough toward your income tax obligations throughout 2020, you could end up with a tax bill — and possibly penalties and interest — when you file your tax returns in 2021.
So keep in mind: The additional $600 per week that the Coronavirus Aid, Relief and Economic Security Act provides for qualifying state unemployment insurance beneficiaries is considered taxable income — and it adds up fast. For example, the extra $600 alone adds up to $9,600 in income if you collect this additional benefit for a 16-week period. That’s income taxpayers will have to pay taxes on for the 2020 tax year. Those who fail to have taxes withheld from their unemployment benefits should consider setting up estimated quarterly payments with the IRS, or setting aside a portion of their weekly checks to put toward their taxes next year.
Your tax responsibilities when you’re unemployed
When you’re out of work, unemployment benefits can help keep you going financially — hopefully until you can find another job.
Unemployment benefits can come from multiple sources, including the following:
- The Federal Unemployment Trust Fund
- State unemployment insurance
- A company-financed fund (which may not be taxable)
- A private fund to which you voluntarily contributed
Generally, unemployment income is taxable as income at the federal level and may be at the state level, too, depending on where you live. But if you receive unemployment benefits from a private fund that you voluntarily contribute to, it’s only federally taxable if the benefits you receive exceed the amount you paid into the fund.
In addition to paying tax on unemployment benefits, if you worked part of the year before losing your job, you may also be responsible for paying federal income tax on those wages, as well.
Typically, employers withhold federal and state taxes from wages, based on how much you earned and information you provided on your W-4 form(s). Whether you owe any additional tax on those wages will depend on the selection you made on your W-4 form(s) and whether your former employer withheld enough federal income tax (and state income tax, if applicable) from your paycheck. If they took out too little, you could owe taxes on that income when you file your returns.
Paying taxes when you are unemployed
Unless the federal and/or state governments act to change the law, you’ll likely have to pay federal income tax (and possibly state income tax) on the unemployment compensation you receive while out of work because of COVID-19.
You have multiple options for paying your taxes when you’re unemployed.
You can choose to have federal income taxes withheld from your unemployment compensation when you apply for unemployment benefits, or you can choose not to do so and just pay estimated taxes each quarter to avoid a tax bill when you file your return.
Of course, you could also wait until you file your taxes and pay any tax you owe at that time. But you may want to think long and hard before choosing that option, especially if you’re worried you may continue to struggle financially even after the COVID-19 crisis subsides. The federal tax system is pay-as-you-go, so you’re supposed to pay taxes on income as you receive it throughout the year. If you don’t pay enough throughout the year, a big tax bill in April might not be your only worry. You could also face a penalty for underpaying your estimated taxes.
“If your total income for the year — including wages, unemployment benefits, interest, retirement distributions and all other income you made — is less than the standard deduction for your filing status, you normally aren’t required to file a tax return,” says Christina Taylor, senior manager of tax operations for Credit Karma Tax®. “In that case, you might not need to have tax withheld from your unemployment.”
“But if your total income exceeds your standard deduction amount, you’ll likely need to file and pay tax on your income,” she adds. “In that case, it’s best to have tax withheld from your unemployment income as you receive it. And if you’re not sure, err on the side of caution, so you won’t get an unpleasant surprise by owing on your next tax return.”
Tax deductions and credits when you’re unemployed
You may be required to file a tax return when you’re unemployed, depending on your situation — and doing so can have benefits. If you’re eligible for any refundable tax credits, the only way to get them is to file a tax return. And itemizing deductions may allow you to recoup certain expenses incurred while you were unemployed.
Earned income tax credit
The earned income tax credit, or EITC, is a federal income tax credit for working people with low to moderate income. If you earned money through wages or self-employment work before losing your job, you might qualify for this credit in the tax year in which you had eligible income.
But unemployment benefits don’t count as earned income for the purpose of the EITC, so if you didn’t have any earned income in the tax year, you won’t be able to claim this credit. Eligibility also depends on other factors, including your filing status, the number of qualifying children you can claim, and the amount of your earned income.
The credit is refundable, meaning that, in addition to reducing the amount you owe, it could give you a refund over the amount of tax you paid in.
Dependent care and child tax credits
If you have children, you may qualify for the child tax credit, which is $2,000 per qualifying child. And if your child tax credit amount exceeds your tax obligation for the year, you may be able to claim the Additional Child Tax Credit of $1,400 per qualifying child.
If you had to pay someone to watch your child or other dependent while you looked for work, you may also be able to claim the nonrefundable child and dependent care tax credit. For 2019 taxes, the amount of credit is between 20% and 35% of allowable expenses, which maxes out at $3,000 for one qualifying person or dependent, or $6,000 for two or more qualifying persons or dependents.
The percentage is based on your adjusted gross income, and you (and your spouse, if married filing jointly) must have earned income in order to claim the credit. This means that if your only source of income in a year was unearned — from unemployment benefits, for example — you would not be eligible to claim this credit.
Retirement savings credit
In addition to certain IRA contributions being tax deductible, you may also be able to take a credit for eligible contributions to your IRA or employer-sponsored retirement plan. The amount of the saver’s credit for 2019 taxes ranges from 10% to 50% of contributions, up to $2,000 for single filers and $4,000 for those married filing jointly, depending on your income.
For example, if you’re single and your adjusted gross income is less than $18,500, you could get a 50% credit — up to $1,000 if you contributed $2,000 or more to your IRA. But if you’re married filing jointly and have an adjusted gross income of more than $62,000, you can’t get the credit.
Finding some help
When you’re unemployed, meeting your daily obligations — let alone tax responsibilities — can be difficult. So if you need additional help, consider taking advantage of any government assistance programs that can offset some everyday living expenses, like the cost of food, health insurance and utilities. Use the Benefit Finder on USA.gov to answer a few questions and find out which benefits you may qualify for.
If you can’t pay your taxes on time
If you do end up owing the government money and can’t pay your taxes on time, the IRS offers several payment plan options that can help you.
But be aware that not paying the full amount you owe by the filing deadline will mean you’ll pay interest and possibly penalties on the unpaid amount — even if you arrange a payment plan with the IRS.
Being unemployed is upsetting for many people, and this year it could feel especially scary. But help is available for people left jobless because of COVID-19.
Just remember that, even when you’re unemployed, you’ll likely have tax obligations. If you don’t have taxes withheld from your unemployment compensation, you should pay estimated taxes on this income throughout the year. If you don’t pay throughout the year, the IRS will expect you to pay the full tax you owe by the filing deadline, and you may face an underpayment penalty. You may also be subject to additional tax on the income you earned while working if you didn’t withhold enough.
Relevant sources: Department of Labor News Release: Unemployment Insurance Weekly Claims | IRS: Unemployment Compensation | 1040 and 1040-SR Instructions Tax Year 2019 | IRS Form 1040 U.S. Individual Income Tax Return 2019 | Coronavirus Aid, Relief and Economic Security Act | U.S. Department of Labor Unemployment Insurance Fact Sheet
A senior product specialist with Credit Karma Tax®, Janet Murphy is a CPA with more than a decade in the tax industry. She’s worked as a tax analyst, tax product development manager and tax accountant. She has accounting degrees and certifications from Clemson University and the U.S. Career Institute. You can find her on LinkedIn.