February 12, 2021
Millions of people lost their jobs or were furloughed due to the pandemic, resulting in widespread financial hardship. Some were fortunate enough to receive severance or company pay while furloughed. If impacted either way, you may have applied for unemployment benefits, once you could get through on the busy phone lines. And now with tax time approaching, you may wonder if you owe taxes on the money you received, and if so, when and how you need to pay those taxes. Here are some helpful points to keep in mind as you get ready to file your taxes.
Is your furlough pay or severance taxable?
- Unfortunately, yes. Any furlough pays and severance benefits from your employer are taxable, and your employer may have withheld taxes from that pay.
- The income and withholding will be included in the W-2 you receive.
- You’ll report the W-2 information on your tax return for 2020 and pay any taxes still due, or (fingers crossed) claim a refund for overpayment.
Do you have to pay tax on your unemployment if you got laid off?
If you received unemployment benefits, you’ll owe federal income tax on those benefits. You’ll receive a Form 1099G reporting that income to you.
You may owe state income taxes as well, unless you live in one of the six states that doesn’t tax unemployment benefits:
- New Jersey
Or you live in one of the seven states that doesn’t have a state income tax:
- South Dakota
Withholding taxes are not automatically taken out of unemployment benefits, so no taxes were withheld unless you opted otherwise. With taxable income received and no taxes withheld, you may be wondering what this means for you. Oh, no, maybe taxes owed?
Isn’t the extra $600 federal weekly benefit supplement exempt from tax?
No, unfortunately not. The state unemployment benefits were boosted by a $600 per week Pandemic Unemployment Assistance supplement through June 2020. That supplement will be included in your taxable income on Form 1099G. Remember, this supplement is different from the Economic Impact Payment stimulus, for which you won’t owe taxes.
What is the glimmer of hope?
If your income for 2020 was lower, your tax bracket may also be lower, which may potentially reduce the taxes you owe. But even if you don’t plan to file until the April 15, 2021 deadline, consider preparing your tax return soon after the first of the year. That will give you a realistic picture of your tax situation, plus a few extra months to get ready financially.
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The information in this article is for general educational purposes only and not intended to provide specific advice or recommendations. Please discuss your particular circumstances with an appropriate professional before taking action.