stimulus

Taxes are a confusing topic in any year, but collecting unemployment ads an entirely new layer.

"Taxes Key" by Got Credit is licensed under CC BY 2.0

Tens of millions of Americans collected unemployment last year, many for the first time. You may be doing taxes after collecting unemployment insurance for the first time, and it is important to note that the process is different in a few key ways from traditional employment.

When you start a new job, your employer will typically set up tax withholding, where you pay your taxes out of each paycheck and calculate any refunds or additional payments owed come tax time. Jobless aid is taxed similarly to income but does not usually have taxes automatically taken out. This is likely to lead to millions of Americans facing a surprise tax bill this spring as Goldman Sachs estimates taxes on unemployment insurance received last year could reach $50 billion. 38% of Americans receiving benefits were unaware that unemployment insurance is taxable and could be staring down a major financial shortfall.

If you collected unemployment last year, here's what you need to know as you prepare your taxes.

1. You don't need to pay Social Security or Medicare taxes

You will be expected to pay taxes on unemployment benefits, but those taxes will be slightly less than if you had received the same amount from traditional employment. That is because they are exempt from Social Security and Medicare taxes, both of which total 7.65% for a usual worker. This means you may be paying a lower tax rate than you expect.

2. You might not need to pay state taxes

If you live in one of the nine states (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming) with no state income tax, your unemployment benefits will also not be taxed on the state level. However, five additional states exempt unemployment insurance from taxation. These states are California, Montana, New Jersey, Pennsylvania and Virginia. If you live in one of these states, you only need to worry about federal taxes on your unemployment benefits. You will likely still need to file taxes for any income from regular employment, but this amount will be much less than if your jobless benefits were also taxed at the state level.

However, things get a bit tricky if you live in Indiana or Wisconsin. Both of these states may allow you to exempt a portion of your jobless benefits from taxation, depending on your total income. In both states, you will need to fill out your "Unemployment Compensation Worksheet" to see if you can exclude any portion of the payments you received.


The United States is a patchwork of different tax policies when it comes to unemployment. Know what your state's policy is.

3. Your stimulus payments are not taxable

The federal government issued two rounds of stimulus payments last year; one in April and one in December. These economic income payments are not taxable and are separate from your jobless aid.

4. The government still has time to reduce your tax bill

If you collected unemployment last year, you might want to consider waiting a bit longer before filing taxes. That's because in February of 2021, Sen. Dick Durbin, D-Ill., and Rep. Cindy Axne, D-Iowa, introduced the Coronavirus Unemployment Benefits Tax Relief Act. If passed, this would waive federal income taxes on the first $10,200 of unemployment benefits received in 2020. This would be a larger version of 2009, when lawmakers provided a similar exemption for up to $2,400 in jobless aid. Right now, it is unclear how likely this bill is to pass both chambers. You may want to consider filing closer to the April 15th deadline or prepare to file an amended return if it does become law.

5. There are options if you cannot afford to pay your tax bill right now

If you haven't set aside enough to pay your tax bill this year, you are not alone and there are other options. The IRS does allow you toapply for a payment plan as well astemporarily delay the collection of your tax debt. Both of these may entail paying interest and fees on top of your tax bill, but this will be much less than if the IRS has to take collection action against you.

If you cannot pay your tax bill by April 15th, contacting the IRS for a payment plan can help you avoid stiff penalties.


6. If you are still on unemployment, set aside money for next year's tax bill

If you haven't been setting aside taxes on your unemployment benefits, you may want to start now to avoid a tax headache next year. Log on to your state's unemployment benefits portal and update your withholding. The federal government will withhold 10 percent of your unemployment income toward your taxes. If you don't, you are still on the hook for the taxes and must determine and pay quarterly estimates on your unemployment income.

7. You may qualify for new tax deductions and credits

Many people saw their incomes reduced by going on unemployment, and this could open up new opportunities to save on your taxes this year. If you were able to work for part of the year, you may now qualify for the Earned Income Tax Credit (EITC), a credit for working people with low to moderate income. Unemployment is not considered "earned" income in this case, so you will likely only qualify if you earned income from traditional work this year. Your exact qualification will depend on a variety of factors including your dependents, your filing status, and your total earned income.

If you were able to save last year, you may also be able to qualify for the saver's credit. This would allow you to receive a credit of between 10% to 50% of your contribution to retirement account, depending on your income and filing status. Remember that you still have time to claim this credit as the deadline to contribute to last year's IRA is not Tax Day this year. If you qualify, you may wish to make a contribution before filing taxes in order to claim the credit.

Your state may have additional credits for you to take advantage of, such as the income-based renter's credit in thirteen states. Look at the tax credits available in your state to take full advantage of any help available in what may be a lower-earnings year for you.

Disclaimer: Paypath and its affiliates do not provide tax, legal or accounting services. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. If you have any concerns regarding your unique tax situation, you should consult your own tax, legal and accounting advisors.

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Today is April 15th, the date usually thought of as "Tax Day."

In a normal year this would mark the deadline for filing your 2019 tax returns, but 2020 is anything but a normal year. As a result of the coronavirus pandemic and resulting quarantine, the deadline for filing taxes has been extended to July 15th.

The hope is that by mid-summer most ordinary business will be allowed to resume so that individuals and companies will be able to prepare their paperwork, and tax preparation services will be back to their usual operation—or will have made necessary adjustments to do their work safely. With record unemployment and the sudden spike in medical expenses, the delay should also make things easier for people who are struggling to manage their rapidly shifting finances.

It remains to be seen if all these hopes will pan out, but in the meantime there are a number of other factors that deserve to be addressed. In particular, the relationship between stimulus checks currently being rolled out and taxes has become particularly fraught and confusing. Sources have variously claimed that the checks—maxing out at $1,200 per adult, with an additional $500 for dependents—will be counted toward recipients' 2020 taxable income, or that they function as advances on a future tax return, and will thus eat into or eliminate the amount people can expect to receive from the IRS later this year.

Fortunately, both of these assertions are false. However much you receive in your check—or deposited directly into your account—it will not affect your income for tax purposes, nor will it have any impact on the amount you receive in your refund. That said, that extra money may not be as miraculous as many people are hoping. While the first payments are arriving in people's accounts as we speak, others will see those badly-needed funds delayed for up to five months, and many will not receive as much as they should rightly expect.

People whose are set up to receive direct deposits from the IRS or the Social Security Administration will get their payments quickly, but for those of us waiting on a check in the mail, the first round won't arrive until sometime in May. The issue is that the IRS has a physical limit on the number of checks they can print and ship out—with the added delay of Donald Trump's all-important signature—and with so many people scheduled to receive stimulus money, that capacity becomes a serious drag on the process.

The other major issue is with the way the amounts are calculated. Individuals with incomes over $75,000 will receive smaller amounts, while the threshold is set at $112,500 for the head of a household and $150,000 for joint filers. Every $100 of income over the threshold will reduce your check by $5—so an individual with an income of $80,000 should receive $950 ($250 less than someone who earned $75,000), and an individual with an income of $99,000 won't receive any stimulus money at all.

The real problem arises from the fact that the income used for these calculations is based on the most recent tax return you filed. So people who earned a lot more in 2019 than they did in 2018 would benefit if they haven't filed yet (although any refund they're entitled to will obviously be delayed), while people whose income dropped in 2019 will receive more stimulus money if they chose to file early. On top of that mess, some may see their checks go straight to debt collectors.

It will take months before we have real a sense of how much the stimulus money and the delay of tax season have actually helped people, but the least we can do in the meantime is try to reduce the noise and confusion around these issues.

Pexels

By Lauren Aguirre

Often the health and vitality of the economy is used as a measure of a president's success. If the economy is healthy, the president is doing a good job. If it's not, then there are some things to work on. Many people will blame the state of the economy on the current president. It's always his fault. But is it really? How much impact does the president really have on the national economy?

The truth is: not much. At least not in terms of practical, concrete means. The federal government has some tangible controls on the economy, but these are usually not enough to prevent a huge disaster like the Great Recession in 2008. And many of them are out of the president's direct control anyway. The economy functions on a natural cycle. An entire and flow of growth and recession. A recession is inevitable in a modern economy, but there are a few tools that can be used to control how bad it can get.

The first tool you're probably thinking of is a stimulus package. A stimulus is often an injection of money into a slowing or floundering economy. The goal is to reinvigorate the economy or reverse a recession. The injection of cash is meant to boost employment and spending on the short term to get the economy back on track. A stimulus package is often negotiated in Congress. Once it's passed, the president signs it. The president is often involved in the negotiations, but he has no real control over what the final bill would look like or whether it will pass.

Another less abstract federal tool is controlling the interest rate. The Federal Reserve, which controls American currency, can raise or lower the interest rate through manipulation of federal bonds. Right now, the interest rate is historically low. It has stayed that way since the Great Recession. This is the rate that banks use to borrow money from each other. And in turn, affects the rates on your savings account and on personal loans. The national interest rate also controls the rate of inflation, or how fast the value of a single dollar depreciates. Low rates encourage borrowing money. High rates discourage it. The Federal Reserve is a part of the executive branch, but it is an independent agency — even though the chairman is appointed by the president. It does heed advice from the president, it ultimately makes decisions outside of the day's political contentions.

However, the president may have more control in terms of the country's morale. Often, the president is the leader of our country and is often looked to for solace or encouragement when times are tough. He can offer hope in a trying time. In fact, the main reason presidents announce plans to fix the economy is to appear strong and in control in the face of a crisis. This image can give comfort to people who are struggling. This can be just as, if not more, important than having tangible controls over the economy.

Overall, the perception that the president sits at the knobs of the economy just isn't accurate. The president doesn't really have much concrete control over the current economic climate. He can offer comfort and some solutions to those suffering in a bad economy. There are a few tools the federal government can use to help the economy along, but no president can make a recession disappear overnight.