With 2021 underway, Americans are still coping with the monumental impact the COVID-19 pandemic had on the economy last year. According to a study from the Pew Research Center, more than 40% of Americans lost their jobs or faced reduced wages in 2020. Many of them may have received unemployment benefits for the first time, not realizing those benefits are taxable as federal income and, in many states, also taxable income.
For the majority of Americans, their financial confidence for the year is tied to their tax outcomes, and surprises at tax time can shake that confidence. Now, those experiencing unemployment or dealing with the stress of making ends meet are facing new financial complexities and uncertainties in filing their 2020 taxes and, potentially, an unexpected outcome. A recent study by H&R Block uncovered 56% of Americans have more tax questions than last year due to the pandemic, with unemployment topping the list. To help with the increased confusion, H&R Block is offering many ways to navigate pandemic-induced tax complexities with help that blends digital services with human expertise and care.
The experts at H&R Block are ready to answer any questions tax filers have. In fact, here are the top questions people had in the survey, along with answers.
Q: Do I need to file taxes if I’ve been unemployed?
A: It depends on your specific situation. Even if you don’t have an income over the $12,400 single filing threshold, you may still need to file a return. The state sends a copy of your 1099-G to the IRS, meaning they have a record of your unemployment income. If you receive a 1099-G and don’t file a return, you are likely to get a letter from the IRS. Filing can allow you to recover any federal taxes withheld over the amount you owed. Filing also helps you determine if you are eligible for credits like the earned income credit, or additional child tax credit, and for people with educational expenses, the American opportunity credit. These credits can increase your refund even if you aren’t required to file.
You can get help navigating the impacts of unemployment benefits on your tax situation by working with an H&R Block tax pro virtually, in an office, or online. Understanding your situation and the next steps is easier when you have experts who know the impacts on your situation.
Q: Do I have to pay taxes on unemployment income?
A: Many people don’t realize unemployment benefits are taxable. You might not have known taxes can be withheld when you signed up for benefits or you may have opted not to withhold taxes. Either way, make sure you understand your current situation — evaluate income from earlier in the year and any taxes withheld — and use that knowledge to create a plan for your new outcome. Tax calculators can help you understand how much you owed in taxes for 2020, allowing you to make a plan for 2021 taxes.
Q: How does unemployment impact my refund?
A: Without withholding taxes from unemployment benefits, it is possible to be surprised by a tax bill or a significantly reduced refund. However, a reduced income or unemployment during 2020 may also mean you can receive stimulus payments you didn’t receive because your income was too high in the form of a recovery rebate credit on your tax return. Depending on your situation, the credit could increase your refund or reduce your taxes owed.
Another important thing to know is that a reduction in income may mean you are now eligible for the Earned Income Tax Credit for the first time. For those who qualify, it can be a substantial credit. H&R Block has the expertise you need to get all the credits and deductions you deserve, whether you want to file with the help of a tax pro or on your own through online with H&R Block Free Online which includes unemployment tax forms.
For help understanding the tax implications of unemployment benefits, visit H&R Block’s unemployment and taxes resource center.