Unemployment Benefits are Taxable (and don't count as Earned Income)
2020 has been such a curveball. With millions of Americans collecting unemployment due to COVID-19, the 2020 tax year will be one of the books. Here's what you should know if you received unemployment benefits in 2020: The CARES Act stimulus package that the federal government passed early in 2020 added $600/week on top of state unemployment benefits while also increasing the number of benefit weeks. Although you may elect to have tax withheld from unemployment pay, it's not required, but this does not mean it's not taxable income.
**Unemployment benefits are taxable income. ** So what does that mean? For federal purposes (and also for most states), you will pay tax on unemployment income received. These benefits will be reported on a Form 1099-G (Certain Government Payments) that'll be issued from your state. The form will show the total amount of unemployment income received, as well as tax withheld (federal and/or state), if any. Federally, you'll always pay tax on unemployment benefits. There are seven states that do not have a state income tax, so unemployment is not taxable in those states. States without state income tax are: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. In addition to those seven states without income tax, there are eight states with income tax, but do not tax unemployment benefits. States with income tax, but that do not tax unemployment benefits are: California, Montana, New Hampshire, New Jersey, Oregon, Pennsylvania, Tennessee and Virginia. Two states exempt 50% of amounts over $12k (single taxpayer) or $18k (married taxpayers); they are Indiana and Wisconsin.
If you received unemployment compensation this year, and are unsure of how the benefits will impact your tax liability, consultant with a CPA, EA or tax preparer. The impact depends on a number of factors, including amount of unemployment received, your other income, your filing status (single, married, head of household, etc.) and whether or not you withheld income tax from your unemployment benefits.
Please also note: Unemployment benefits do not count towards Earned Income Tax Credit (EITC/EIC) eligibility. If you typically receive the Earned Income Tax Credit, but have substantially less "earned" income this year, you may see a significant decrease in the amount of earned income credit received. ASE Group can help you navigate your taxes with the inclusion of unemployment income. We can help you avoid costly mistakes when completing your tax return. Want to discuss your individual tax needs and the impact of your unemployment benefits as it pertains to your 2020 tax return?