Unemployment Benefits, Job Loss and Taxes
As a result of the COVID-19 pandemic and economic crisis, more than 36 million employees or taxpayers filed for unemployment benefits by May 2020. The basic criteria to file for and to be approved for unemployment benefits is, if you through no fault of your own, lost your job or have been laid off.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act created a new temporary federal program called Pandemic Unemployment Assistance or PUA. PUA provides up to 39 weeks of unemployment benefits to individuals not eligible for regular unemployment compensation or extended benefits, including those who have used up those benefits. Individuals who can possible get PUA include the self-employed (e.g. independent contractors, gig economy workers, and workers for certain religious entities), those seeking part-time employment, individuals lacking sufficient work history, and those who otherwise do not qualify for regular unemployment compensation or extended benefits.
For state unemployment, the application and approval process for unemployment benefits varies by state. In most cases, in order to be approved for unemployment benefits, you must have been employed at your last job for a certain time period before you got laid off.
In most states unemployment benefits are paid weekly for 26 weeks after the unemployment application and approval process. Alabama, Arkansas, North Carolina, South Carolina, Missouri offer 20 weeks maximum in unemployment compensation; Idaho 21 weeks, while Florida offers 12 weeks.
Unemployment and Income Taxes
Unemployment compensation is considered taxable income by the IRS and most states, thus you are required to report all unemployment income as reported on Form 1099-G on your income tax return. You should be mailed a Form 1099-G before January 31, 2020 for tax year 2019 or January 31, 2021 for tax year 2020 of the year stating exactly how much in taxable unemployment benefits you received.
Tax Withholding in 2020: Start and estimate your 2021 Income Tax Return first and factor in the unemployment benefit payments or income. If you see as a result a large tax refund, you should start withholding taxes from your unemployment benefit payments or other income you might have (e.g. W-2, 1099 income, etc). Based on the estimated tax return results, you might want to have 10% withheld for IRS or Federal taxes. To do so, complete the Voluntary Tax Withholding Request Form W-4V and submit to your state tax agency (click your state below and scroll to the bottom for the state agency address). The state agency will then withhold federal income taxes from your unemployment benefit payments. Alternatively, you can also submit Form 1040-ES with quarterly tax estimat payments.
If you need to estimate other W-2 related W-4 based tax withholding, use the eFile.com WITHHOLDucator.
Severance Pay and Other Compensation
Remember that any severance pay or unemployment compensation you receive is taxable, in addition to any payouts received for accumulated vacation or sick time, so be sure that enough tax is withheld from these payments. Make sure you receive your final W-2 from your former employer to use for your tax return. Companies are not required to send out W-2s right away, but must provide them to all employees (even former ones) by January 31 of the following year. If you have left the company, this would be the year after you leave.
Health Insurance And Job Loss
Did you know that a federal law, known as COBRA, requires your employer to allow you health coverage under their policy for 18 months after you are laid off? (the law doesn't cover firings for gross misconduct.) However, you must pay the full cost of the premium, plus an administrative fee. Check around, because if you are healthy, you might find cheaper premiums than what you would spend on a COBRA policy. If you get a high-deductible policy, you can set up a Health Savings Account (HSA), which lets you make tax-deductible contributions and withdraw the money tax-free for qualified medical expenses. You will still need to report your health insurance coverage on your return in the year that you lose your job if you wish to claim the Premium Tax Credit. If your health insurance changes as a result of your job loss, or if you get another job, be sure to report any income changes, or loss of health insurance to the Marketplace if you are claiming the Premium Tax Credit.
Using Retirement Savings For Expenses
Losing your job is tough and you might be tempted to dip into your qualified retirement plan, IRA, or 401(k) account. Try not to do this if you can. If you cash in your retirement plans, you will pay tax on every dime you withdraw (unless you have made after-tax contributions or you have certain extenuating circumstances). Even worse, if you are under age 59 1/2 in the year you leave your job, you will also be hit with a 10% tax penalty. Make sure that you don’t jeopardize your retirement savings and compromise your long-term financial health.
However, if you have enough money in your 401(k) account, you can leave your money with your old employer, where it will continue to grow. You might be better off transferring your 401(k) balance to an IRA, where you would have almost unlimited investment options. You can request your old employer to send the money to the IRA. If you have the money paid to you, with the idea that you will deposit it in the new plan, the law requires your old plan sponsor to withhold 20% of your money for the IRS. It's tough to roll over money that's been confiscated by the IRS.
You are also able to roll 401(k) money directly into a Roth IRA; but for now, if you want to use the Roth option, you must transfer your money to a regular IRA and then convert that account into a Roth. In either case, you have to pay taxes on the amount shifted to the Roth IRA, but all withdrawals after retirement will be tax-free. If part of your 401(k) is invested in your old company's stock, be sure to check out the special rules for net unrealized appreciation in IRS Publication 575 - Pension and Annuity Income, which could save you money.
If you lose your job, you might decide to start your own business. New business owners should check out the information that the IRS provides for you in IRS Pub 334 - Tax Guide For Small Business. You should also review the tax implications of being newly self-employed.
Unemployment Benefits and State Taxes
Unemployment benefits are subject to IRS income taxes. For state incomes taxes see below.
Weeks: The maximum number the state will pay unemployment benefits within a tax year.
Benefit: The maximum Dollar amount per week paid by the state in unemployment benefits.
Max.: The maximum Dollar amount per tax year paid by the state in unemployment benefits.
State Taxes: Indicates if the unemployment benefits are subject to state income taxes for the given tax year.
Data below is as of May 22, 2020 and is subject to change.
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