Waiting to file your taxes could mean more money for you
Do you typically get a tax refund? You may be in for an unpleasant surprise if you received any unemployment compensation last year. About 40 million Americans received unemployment benefits in 2020, and many of them will actually owe taxes this year.
Fortunately, the unemployment tax break that was part of the third stimulus package aims to lessen that burden, and waiting to file your taxes could mean a refund instead of you owing money in taxes.
What does the tax break mean for me?
If you received any amount of unemployment money, you’ll be getting a tax break. The federal tax rate on unemployment is 10 percent. If you didn’t have that withheld in advance, normally you’d be paying back that 10 percent when filing taxes. But thanks to the rescue plan approved in March, there will be no federal taxes on the first $10,200 received in unemployment. This could mean an extra $1,020 or more in your pocket.
Use this online tax tool to estimate whether you’ll be receiving a refund or owing money.
What do I have to do to get the tax break?
If you haven’t filed your taxes yet, you have a few options. Online services like H&R Block, Credit Karma, and TurboTax, which offer free filing options, have already updated their software to include this federal tax break. You’ll have to input your unemployment info (a Form 1099-G was either mailed to you or you may need to download it from your state’s unemployment portal) and their software will do the rest.
You can also use the IRS Free File service, which lets you file your federal taxes for free through a partner site (for those with income $72,000 and below) or allows you to download fillable forms that you do yourself. State tax returns are not necessarily free, however.
If you choose to go in-person to a tax preparation office, they’ll be able to help you file your tax return, but you’ll likely need to pay for that service.
You can search for free tax prep help through the IRS website by clicking here.
What about my state return?
Each state has their own laws on if your unemployment benefits are taxed. There are a handful of states that don’t tax unemployment compensation specifically – California, New Jersey, Pennsylvania, and Virginia – plus seven states that don’t have state income taxes – Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.
Many states tax unemployment compensation to the same extent it is taxed under federal law. This means you may also be getting a tax break up to $10,200 on your state unemployment benefits. However, states will have to adopt this change for it to take effect. For example, New York has not and is still requiring taxes on unemployment benefits.
How long can I wait to file my taxes?
If your state is one of those that requires taxes on unemployment benefits and they have not adopted the new $10,200 tax break, you may want to wait until the deadline in hopes they amend their law. This may help you avoid any future work to get that taxed unemployment money back. The federal tax return deadline has been pushed back to May 17, 2021, and most states have pushed their filing due dates back until at least May 17 as well. But, there are a handful of states that currently have an April 15 filing due date and tax unemployment compensation.
What if I already filed my taxes?
As of now, the IRS has issued a statement strongly urging taxpayers not to file an amended return. At some point, they will provide taxpayers with additional guidance on what, if anything, they need to do to get that money back.
Have you already filed your taxes? Did the new unemployment tax break help you?
If you filed already can you amend your taxes