Understanding how the unemployment compensation from which you are receiving benefits affects your taxes is important. Filing a tax return might still be required even if you are not earning income. Once you have met the realization that you are still eligible to pay taxes due to the benefits you have been deriving, the steps that follow must be to understand if there are any special benefits for a person who has been unemployed for a considerable amount of time. The IRS has quite clearly mentioned the circumstances that every person would experience while filing their taxes, whether it is quitting a career or a sudden expected break from being employed.
In this post, we try fleshing out the basics of what it means to pay taxes if you are on a break from your career.
Eligibility, as defined by the IRS.
If you are unemployed and wondering whether you have to file taxes, it depends on the total income during the year. According to the IRS, you must file taxes if you are under the age of 65 years, your status is single, and you collected over $12,400 as income. Filing together if you are married, you’ll need to file if your combined income was greater than $24,800. If you do not have any real wages to report when you file, chances are your return will be rejected by the IRS.
Another valid question that you would have already thought about would be whether you have to pay taxes on unemployment in the first place. The answer is yes, your unemployment compensation is considered taxable income by the IRS (and most states, too). A small percentage of your total income for the year could be taxed if exceeding the minimum amount required to file. You can make estimated payments or have taxes withheld from your unemployment income during the year – it’s your choice to make sure you are not caught off guard with a tax bill when you file. Fill out Form W-4V, Voluntary Withholding Request, to have income withheld from your unemployment compensation during the year. And to calculate what you will need to have withheld, use the Tax Withholding Request.
So what do you need to file unemployment taxes?
Firstly, you should receive Form 1099-G from your state showing the total amount of unemployment income you need to report. You will also need a W-2 from your previous company or employer if you were employed for any period during the year.
What about tax breaks for unemployment?
Many people may overlook a tax benefit from the Earned Income Tax Credit(EITC), intended to help taxpayers with low to moderate-income. Your total income, filing status, and how many qualifying children you have are factors that affect the amount of credit you can receive. You can receive up to $6,660 for the tax year 2020 (related to the taxes filed in 2021).
To offset these costs, you could receive a tax credit if you pay for childcare while looking for work. Depending on your income, you can claim an amount for the Child and Dependent Care credit, although it can be worth up to 35% of your childcare expenses.
You must have received income to report on your return for the EITC and the child care credit. Your unemployment payment does not count toward these since it is not “earned. You can still certify based on what you earned while you were still employed if you lost your job during the year. Other benefits could mean reaping benefits during your job search. These are mentioned as ‘minimized items deductions’ in IRS publication 529, which is about 2 percent of your adjusted gross income.
You can claim the Child Tax Credit, a tax benefit worth $2,000 per child if you have a child under 17. Your child will have to meet certain requirements to be eligible, although you do not need to have an income to qualify for this credit. Your ward may qualify for a separate dependent credit worth $500 if you claim anyone over 17.
If you file a tax return, will you have to pay taxes?
Filing your return does not mean that you will owe taxes. Although the IRS will come to know about your annual income, your life situation, and any deductions and credits you qualify for.
Hence that is the reason why you must file a tax return to receive an IRS refund. Moving into a lower tax bracket by people who lost their job is common. If that happened to you, the withholding amount you had from your job was in all likelihood too high, which could mean a bigger refund for you.
At UBOS, our experts are always available to guide you with anything related to tax planning, tax strategies, and more. Do contact us today at ubos.pro to begin your consultation and learn more about how we can help you!