Unemployment and Taxes

Did you know unemployment benefits count as taxable income? If you (or someone you know) have received unemployment income during this year when so many people have experienced job loss, here is the bigger question: Did you have taxes withheld from the payments?

If you are currently receiving unemployment income, now is a good time to check and see if federal and state income taxes are being withheld; if they are not, you should be able to change that going forward. Why does it matter? Next winter when you file your 2020 tax return, you will find out how much tax you owe on your 2020 income. If you didn’t have enough withheld from your paychecks, then you may need to pay in by April 15. It’s possible that the amount you need to pay in could be $1,000, $2,000 or even more. In addition, you may owe penalty for not having enough withheld, and/or a penalty for late payment if you cannot pay the bill in full by April 15.

What can you do now? If you received unemployment income and did NOT have taxes withheld, I would encourage you to go to the IRS Tax Withholding Estimator, and enter information about all your income for the year, along with the information it asks for about family size and other tax-related issues. Don’t worry; this is anonymous – it’s just a calculator for your own benefit. Based on the results of your calculations, you should have a pretty good idea of what to expect. If it looks like you will owe taxes, you can start saving now, or even send in one or two quarterly estimated payments using IRS form 1040 ES. Checking in with your tax preparer might also be a good idea.

The IRS recently issued a poster alerting people to take action and avoid the unpleasant surprise of a big tax bill. If you can, please consider posting it on social media or posting printed copies at your place of work, or house of worship, or at local businesses, to help others plan ahead.

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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When Income Goes Down…

bar graph showing 7 months income and expenses; first month income and expenses equal, then income suddenly drops, while expenses decline slowly, until in the seventh month they are in line with lower income.

When income goes down, it often goes down suddenly – one month it is normal, and the next month it is suddenly much less. People may be much slower to reduce their expenses, often taking many months until their expenses are finally in line with their new (lower) income. Why? Denial, unwillingness to modify their lifestyle, lack of needed skills, or other reasons.

That slow response will, unfortunately, delay their recovery and increase their financial problems. The graph (above) depicts a family whose income declined by $800/month. It shows five months where the family’s expenses continued to exceed their new income. During those five months, their spending exceeded their income by a total of $2,000.

Where did that $2,000 come from? Perhaps they had an emergency savings account – if so, the balance in that account is now depleted. If they, like many Americans, had no savings, then they had no choice but to go in debt — they may have made partial payments on some bills, or built up the balance on their credit cards. They are $2,000 in the hole. And while it only took a few months to get into that hole, it may take years to repay that $2,000! (or to rebuild their savings)

The second graph depicts the same situation, but in this case the family rapidly reduced their spending to match their new income. This family also spent more than they earned, but only in the first two months, and only by about $500. They will recover much more quickly from this financial setback.

Reducing expenses isn’t easy. But in the long run, people who quickly adjust to the new situation are more satisfied with the outcome. Even in situations where the income reduction is expected to be temporary, people who adjust quickly come out of the situation in a stronger financial position.

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

More Posts

    

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