Millions of taxpayers have filed for and collected unemployment benefits in 2020. Many of those collecting unemployment benefits have been doing so since March and may remain on unemployment through the end of the year.
Because Unemployment benefits are subject to Federal and some state’s income tax, Taxpayers such as these are a greater risk of creating a tax bill for 2020.
Most Taxpayers receiving unemployment benefits are doing so through a state unemployment program. These benefits are taxable for Federal purposes and are taxable in some states. As an example, California does not tax unemployment benefits, but Hawaii does.
If Taxpayers receiving these benefits fail to have income tax withheld, then they are susceptible to owing a significant tax bill for 2020. To avoid this issue, taxpayers should elect to have taxes withheld from their unemployment benefits even if it results in less money in their pocket. This is not always an easy choice since unemployment benefits are not likely to cover all necessary living expenses, but such a step will help to avoid a tax bill for 2020.