Some taxpayers are in for a nasty surprise in 2021
The coronavirus pandemic has triggered a massive unemployment crisis in the United States. Although the unemployment rate has declined since hitting a record high in April, millions of Americans are still out of work and rely on benefits to pay their bills. But it is these workers who can face a very unpleasant surprise when they begin filing taxes for 2020 next year. Fox Business.
If you received unemployment benefits, you may not realize that this income, like your regular salary, does not belong to you entirely. Although unemployment benefits are not subject to payroll taxes, which are used to fund Social Security, you must pay federal taxes on that income.
Typically, you will be given the option to withhold 10% of your weekly benefit for this purpose before you start receiving this money. Otherwise, you may receive the full benefit and then make the estimated quarterly tax payments to the IRS.
But you cannot sit back and assume that you will not face the benefit tax liability, because that is simply not realistic. And, unfortunately, many people are not aware of this. In a recent survey, 38% of respondents said they were unaware that unemployment benefits were taxable. Moreover, 61% of respondents did not withhold or save money from their unemployment salary to pay their 2020 income tax.
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Result? Many people may face a serious tax bill in April when the 2020 tax deadline is due. As Mark Steber, director of tax information at Jackson Hewitt Tax Service, explains:
“There is a real likelihood of a tax-filing shock this season. A large number of people receiving unemployment benefits are unaware that benefits are taxable, that taxes are not automatically withheld, or that unemployment benefits may affect other tax benefits. This group, especially those accustomed to receiving refunds, may be shocked to see that they really have to pay taxes on April 15th. This may be due to the fact that the tax at the source of payment is not withheld. ”
If you are receiving unemployment benefits and do not want to deal with tax difficulties in the future, try to withhold some of this income for federal tax purposes - even if you did not do so initially. Some states will allow you to change your tax lien as soon as you start receiving benefits.
And if you've been receiving benefits for most of the year and haven't paid a dime in taxes on that money, schedule an estimated quarterly payment to the IRS by January 15th. If you leave this tax debt thinking that you will simply pay it off when you file your 2020 return in April 2021, you risk accumulating interest and penalties on that unpaid amount.
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Remember that the US tax system operates on a pay-as-you-go basis. The IRS wants to get its share of your unemployment benefits. The better you prepare now, the less likely you will be overwhelmed when April hits.
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