Each year, millions of people receive unemployment benefits. And each month, billions are paid out in benefits. Yet many folks fail to realize that they’re required to pay taxes on unemployment benefits, as the federal government and many states consider it taxable income.
The tax bills, both from the individual and government’s perspective, are no small matter. In September 2020 alone, the American government shelled out over $13 billion as people lost their jobs amid the global COVID-19 pandemic. While the government paid out $2.7 billion in September 2021, that’s still a large chunk of cash and will generate considerable tax liabilities.
During the pandemic, the government provided expanded unemployment benefits. However, those, too, could inflate your tax bill. The $600 expanded unemployment benefits provided by the CARES act and the $300 benefits from the later relief packages are considered taxable income.
There’s an important caveat, however. The American Rescue Plan offered a tax break on the first $10,200 of unemployment benefits so long as your (single or couple) adjusted gross income was less than $150,000. Keep in mind that this is a federal tax break, and you may need to pay state taxes.
How about the stimulus checks offered through the CARES Act and the American Rescue Plan? Those are not taxable as they are actually tax credits.
Taxes are (ideally) pay as you go. You should have been paying taxes on your income by sending money to the IRS while receiving benefits. You can pay monthly or make estimated quarterly payments. Waiting until tax day to pay may result in penalties.
Don’t have the cash to pay for your taxes? In some cases, the IRS offers taxpayers payment plans. However, you may face penalties and fees.
Even if you can’t pay your taxes, you must report the income and file tax returns. The federal government can charge you with crimes for failing to file taxes, and obviously, falsifying your tax returns can also result in charges.