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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Time to change your W-4?

IRS logo 2Tax time is a good time to check up on many aspects of your finances.  As I gather documents for my own tax return, I am aware that 2014 will likely be the last year in which I can claim a dependent.  That also means my filing status will change from “Head of Household” to “Single” in 2015.

With that in mind, I made some changes to my W-4 form.  When is the last time you checked your own W-4 form to see if it needs changes?

If you are an employee, you have a W-4 form on file with your employer.  The information on the form guides the employer’s withholding of federal and state income tax from your paychecks.  We fill those forms out when we start a new job; unfortunately, we sometimes never look at them again.  If you have changes in your marital status or the number of dependents in your household, it’s generally wise to review your W-4.

What happens if you don’t?  It could mean a surprise when you file your tax return.  In a situation like mine, where I no longer have any dependents, failure to change my W-4 would probably mean I would need to pay extra tax (and maybe a penalty) when I file my 2015 tax return.

In a situation where the number of dependents goes up, you would get a larger tax refund.  Generally that’s happy news to people, BUT…  I always wonder how much better off they would’ve been with less income tax withheld from their paychecks all year long.  Perhaps they would have had greater financial stability, less stress, fewer late fees, and less debt if they had received their pay throughout the year, rather than waiting for their tax refund.

Personally, I’m relieved that I remembered to make the change.  More taxes will be withheld from my monthly paycheck, which will prevent an unpleasant surprise at tax time a year from now.

~Barb

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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