The COVID-19 pandemic rocketed the economy and millions of Americans were unemployed. Even if you may not be earning a paycheck, you can cover your expenses with unemployment insurance.

While unemployment benefits are crucial for many people who are currently unemployed, collecting unemployment can cost you when the tax period runs around.

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You can apply for unemployment if you have lost your job through no fault of your own. Under the CARES law, unemployment insurance increased weekly paychecks by $ 600 and extended coverage for another 13 weeks. This original plan expires on July 31, although you can still apply for and receive unemployment insurance – only without the additional benefits.

Do you have to pay taxes on unemployment?

When you collect unemployment, the IRS considers this "taxable income". If you submit taxes for the 2020 tax year next year, you must claim your unemployment checks as income. You will be taxed at your normal tax rate.

If you have taken out unemployment insurance this year, you will receive a Form 1099-G that shows how much money you have received from unemployment benefits.

Regardless of whether you received additional money from the CARES law or collected it before it came into force (or after it expired), your checks are considered taxable income. If you pay state income tax, you may also have to pay taxes at both state and federal levels.

Depending on where you live, your unemployment checks may be tax free. There are some countries that do not have unemployment tax:

  • California
  • Montana
  • New Jersey
  • Oregon
  • Pennsylvania
  • Virginia

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This way you avoid a large tax burden

For most people, you will eventually pay taxes on your unemployment benefit. You have several options:

  • Pay when you submit your tax return.
  • Make estimated quarterly tax payments.
  • Have your taxes withheld automatically.

If you want to maximize your benefits now – especially if you need every dollar of your unemployment insurance – you can pay your increased tax bill when you file your tax return next year.

If you can afford it, you can either make quarterly tax payments or sign up to have taxes withheld automatically.

Estimated quarterly payments: Many sole traders and freelancers make estimated quarterly tax payments for business purposes (including side jobs), and you could pay your taxes the same way. This is helpful to spread your debts and pay them every three months. But because they are valued, you could end up paying too little and face a tax penalty. Or you might overestimate and overpay, but then wait for a tax refund.

Automatically withheld: If you would like your unemployment checks to be taxed like a regular paycheck, you can fill out a W-4V form. This way you can be taxed in advance and avoid a bigger tax burden if you submit next year. This eliminates taxes. However, if you need as much money as possible, less money will be available.

Continue reading: How to estimate your tax refund for 2020: tips, calculators and more


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