Millions of Americans have received, or are currently receiving, unemployment benefits due to being laid-off in the wake of the COVID-19 pandemic. For many recipients, this may be their first time receiving unemployment, and may not be aware that unemployment compensation is considered taxable income – including the extra $600 provided by the CARES Act from March through July. For individuals and families already struggling through this ordeal, this has the potential to introduce a whole new level of financial hurt in the form of significantly large tax bills and reduced refunds as the 2021 tax season approaches.
While unemployment compensation must be reported on your federal income tax return for the year it was received, you can avoid an unexpected tax bill by electing to have taxes withheld from this compensation now. The ALG Group is here to help, keep you informed, and make sure you understand your options. Let’s get started!
Withholding is voluntary, but by federal law, those who receive unemployment compensation may choose a flat 10% withholding to cover part or all of their tax liability – this will help you avoid a big tax bill when you file your tax return. In order to do this, you must complete IRS Form W-4V (Voluntary Withholding Request) and submit it to the agency paying your unemployment benefits. Do not send the form to the IRS. If the paying agency has its own request form, use that instead. If you have questions, we can help!
In January 2021, you should receive Form 1099-G (Certain Government Payments) from the agency paying your unemployment benefits. It will show you the amount of unemployment compensation during 2020 and any federal income tax withheld from it. We can work with you to ensure this information gets reported properly on your 2020 federal tax return, along with any other income you might have received. Our goal is to help you avoid any unexpected tax bills and maximize your potential return.
Yes. If you received any of the payments below, we can help you check to see if taxes can be withheld, or how to handle these payments on your tax return:
If you return to work and thus stop receiving unemployment compensation, or receive a pension, you can use the IRS Tax Withholding Estimator available on IRS.gov to ensure the right amount is being taken out of your paycheck. This can help you avoid or lessen year-end tax bills similar to withholding, and even estimate a refund. The ALG Group is also here to help you navigate your specific withholding situation and help you properly file your tax return.
There is no doubt that 2020 has taken an immense toll on all of us. The last thing you want is to be faced with a big, unexpected tax bill at the start of 2021. We can help you avoid that situation! The ALG Group is here for you at tax time and year-round, providing not only professional tax planning and preparation, but also a breadth of resources and education to elevate your awareness and support your long-term financial health. Let us help you prepare for the upcoming tax season – give us a call today!