HOW UNEMPLOYMENT AFFECTS YOUR TAXES
If one thing is certain, it’s that unemployment can be a stressful and challenging time, especially if you need help understanding how it affects your taxes.
In this blog article, we'll go over some of the critical things you need to know about how unemployment affects your taxes so that you can approach next tax season confident and TAXiety-free.
Is Unemployment Income Taxable?
Yes, according to the IRS, unemployment benefits are considered taxable income. This means you must report them on your tax return and pay taxes just like you would for any other income you receive. However, there is a silver lining — you can claim a credit or deduction to offset some of the taxes you owe on your unemployment benefits. More on that later.
How to Pay Taxes on Unemployment Income
- You must file a tax return even if you don't owe any taxes.
- If you received unemployment, you may still need to file a return if your gross income is above a certain threshold.
- If you received unemployment benefits while earning wages from a job, you might be required to make estimated tax payments throughout the year.
- These payments are used to pay the taxes you owe on your income, and you'll need to make them if you expect to owe at least $1,000 in taxes after subtracting any tax withholding and credits.
- If you received unemployment benefits in the previous year, you must file your tax return by Tax Day.
- If you owe taxes and can't pay them in full by the deadline, you should contact us to file your return on time and pay as much as possible to avoid incurring additional penalties and interest.
What Tax Credits Can Help With Unemployment?
One such credit is the earned income tax credit (EITC). This credit is designed to help low and moderate-income individuals and families by reducing the amount of taxes they owe. To qualify for the EITC, you must have earned income from wages, salaries, or self-employment. Unemployment benefits count as earned income, so if you meet the other eligibility requirements, you may be able to claim the EITC.
Another potential tax break for those receiving unemployment benefits is the deduction for job-search expenses. If you are actively looking for work while receiving unemployment benefits, you can deduct certain expenses related to your job search, such as the cost of resumes, travel to job interviews, and employment agency fees. To claim this deduction, you'll need to itemize your deductions on your tax return and meet other requirements.
It's worth noting that if you received unemployment benefits in the previous year but returned to work this year, you may be able to claim a credit for any taxes you paid on those benefits. This credit is called the credit for taxes paid on unemployment compensation. To claim this credit, you'll need to file a Form 1040 or 1040-SR and attach a statement showing the amount of money in unemployment benefits you received — and the taxes you paid on them.
Unemployment can have a significant impact on both your mental well-being and your taxes. To eliminate TAXiety, it's crucial to understand how unemployment benefits are taxed and what credits or deductions you can claim to offset some of the taxes you owe. By staying informed and taking steps to minimize your tax liability, you can make the tax season less stressful during an already challenging time.
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We’re here to shed some light on your tax journey, making tax preparation a breeze and giving you the confidence that your taxes were done right. If something specific is giving you TAXiety and you want relief now, don’t hesitate — schedule an appointment with your local Liberty Tax. In-person meetings not your thing? You can start your return with our mobile app or utilize our virtual tax pro.