You Were Temporarily Furloughed and Then Came Back to Work – What Does That Mean for Your Taxes?

Getting furloughed, laid off, or fired hurts. Your morale might take a hit and losing a regular paycheck can impact your finances. Fortunately, some people who experienced this due to the pandemic were eventually able to go back to work.

If you were furloughed and your paycheck continued during your furlough, then your finances and taxes likely didn’t change much. But if you had a gap in pay with a corresponding gap in taxes withheld, what does that mean for your overall 2020 tax picture?

If you received unemployment benefits during the period you weren’t working, those benefits are taxable. However, income taxes weren’t withheld unless you made a special request. As a result, the taxes on those benefits will be due when you file your tax return this spring or will reduce the amount of your tax refund.

Speaking of refunds, the amount of your refund depends on how much was taken out of your paycheck for income taxes compared to the actual taxes on your tax return. If you had more taken out than the actual taxes, you are due a refund of the difference. But during the weeks or months you weren’t receiving a paycheck, nothing was taken out. That will result in a lower refund for 2020.

There may be a few rays of sunshine to help brighten the outlook, though. Our system of income taxes is graduated, with higher rates applying to higher incomes. If your income dropped for 2020, your tax bracket may have dropped as well. That could potentially increase your refund a bit. And if your income is lower now, that could make you eligible for tax credits that didn’t apply to you before, such as the Earned Income Tax Credit.

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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.