How to: File unemployment earnings and reduce your tax burden
With so many claiming unemployment benefits for the first time in 2020, there’s bound to be confusion about how to file taxes this year. #Unemployment aside, this year has marked a lot of change in the types of employment people largely rely on, with many working gig economy jobs or remote jobs to get by.
If you’re someone who had many streams of income, or who claimed unemployment benefits for the first time, here are some things you can do to avoid a heavy tax burden this season and beyond.
Be aware of what’s taxable and what isn’t
This year you may have gotten income from many different sources. Come tax time it can be difficult to understand which of that income is taxable and which isn’t taxable. Luckily, the IRS released taxable income guidance this year to help clarify what income you need to pay tax on (taxable income) and what income you don’t need to pay taxes on (non-taxable income).
Here are some of the most common taxable and non-taxable income types we found in the IRS’s recent article on 2020 income taxes:
Common income that is taxable
If you received any of these types of income this year, expect to pay tax on whatever you earned in 2020 through:
- Part-time or full-time employment wages - for both hourly or salaried income, including any tips you received on the job. If you have an employer, they should send you a W-2 tax form with all the tax information you need about that income included.
- Gig work or self-employment income - where taxes were not withheld from your gig wages and/or tips plus any money you made by being self-employed is taxable income.
- Unemployment benefits - including state and federal unemployment, like Pandemic Unemployment Assistance (PUA), or any other unemployment benefit you claimed in 2020.
- Severance pay - you may have received if you were laid off, which includes any payouts for unclaimed paid time-off (PTO) at the time you were let go.
Common income that’s not taxable
- Economic Impact (Stimulus) Payments - are not taxable, however if you received both stimulus payments, you cannot also claim the Recovery Rebate Credit.
- Veteran’s benefits - like veteran’s disability payments from injuries sustained while serving and any other qualified veteran benefit payments.
- Alimony or child support payments - are not taxable income for the recipient of those payments.
See the IRS’s official article on all taxable and non-taxable income in 2020 to see more info, know where we got this information and find out how to file less common forms of income.
Withhold tax on your unemployment payments
If you received unemployment payments in 2020, that income is taxable. When you file, you do have the option to withhold taxes from your unemployment payments, which is highly recommended by the IRS, but not required. If you didn’t do this, you may have a higher tax burden to pay off this year than you expected.
If you expecting to continue receiving unemployment in 2021, consider either:
- Withholding tax on your unemployment payments going forward, or if you prefer to have the money on-hand just in case,
- Set 10% of every untaxed unemployment payment aside in a savings account to reserve it for your 2021 taxes.
This will assure that you don't get blindsided by a high tax burden due to claiming and fully spending the untaxed amount of your unemployment payments.
Understand which tax credits and deductions you can claim
Claiming tax credits and deductions you qualify for can be a great way to reduce the amount of taxes you owe. This year there are a whole host of 2020 tax credits and deductions that can help you to reduce the amount of taxes you owe, or even generate a tax refund.
Understanding which you qualify for and claiming sooner rather than later will ensure that you pay the lowest amount possible in taxes for 2020.
See the IRS's official page on tax credits and deductions for more information on which you might qualify for.
Don’t bank everything on an incoming refund
While getting a big tax refund can feel like an exciting windfall, the IRS doesn’t want you to count on that money too soon. While it may be tempting to promise your tax refund to several time-sensitive bills or urgent needs, remember that it can take up to 21 days for a tax refund to be delivered.
If you need cash now, consider looking for short-term work to help you support yourself while you wait for your tax refund.
Do you have tax tips to share? Tell us more below
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