Over the past five weeks,  26.5 million Americans have filed initial claims for unemployment, according to the U.S. Department of Labor. That’s in addition to the 7.1 million unemployed Americans reported before most of the country shut down in response to the COVID-19 pandemic. 

On March 27, 2020, the President signed the “Coronavirus Aid, Relief, and Economic Security Act” or the “CARES Act” into law. A significant feature of the CARES Act is an expansion of unemployment benefits, including for part-time, self-employed, and gig workers. 

The amount that you can receive varies by state but typically works out to about half of your prior income. Benefits are generally payable for 39 weeks (pre-CARES Act, it was 26 weeks in most states). In addition to state benefits, the federal government is paying out an additional $600 each week until July 31, 2020.

The rules for eligibility also vary by state since each state sets its own guidelines. Typically, however, you qualify if you are unemployed through no fault of your own, and you meet work and wage requirements established by your state. You can review the details of your state’s program here.

Of course, these numbers just tell half of the story. There’s a lot to consider, including how to pay the bills, getting a new job, and figuring out your unemployment benefits. The last thing that you’d need to worry about is taxes, but you shouldn’t push them off until next year – and you may be able to take advantage of tax benefits available now. Here are 11 tax-related tips to help you sort it out:

  1. For federal income tax purposes, unemployment compensation is taxable. To be clear, this includes your state benefits and the $600 payment from the feds. That amount (again, including the $600 per week) will be reported to you on Form 1099-G. It’s important not to forget this part: don’t spend your benefits without thinking about the consequences.
  2. To lessen any surprises, you can choose to have federal income tax withholding from your benefits during the year. This is similar to withholding on your paycheck and means that you should owe less at tax time (or preserve your refund if you’re entitled to one).
  3. If you’re worried that you might owe at tax time, consider making estimated payments during the year to avoid a potential penalty. The Internal Revenue Service (IRS) has waived penalty and interest on payments previously due on April 15, 2020 (now due July 15, 2020).
  4. Generally, withdrawals from your pension or retirement plan are taxable unless they are transferred to a qualified plan like an IRA. As part of the CARES Act, the tax isn’t due all at once: you have three years to pay it back. The treatment of retirement income or accrued benefits can be tricky, so check with a tax professional or your benefits administrator for details.
  5. If you’re considering tapping your retirement account to get extra cash, there’s some good news. Typically, a 10% early withdrawal penalty applies if you raid your retirement account before you reach 59-1/2 unless you meet an exception. But for 2020, you can withdraw up to $100,000 from your 401(k) or IRA without being subject to the penalty. You’ll still owe income taxes on the withdrawal (see again #4).
  6. If you need extra cash, you may be able to take a loan against your 401(k). Under the new law, you can borrow up to 100% of your account or $100,000, whichever is less, through September 23. When it’s time to pay it back, you can defer repayment up to a year – and you have five years to pay it back without being subject to tax. Be sure to check with HR: while the law permits these changes, they don’t mandate them, and the rules for your plan may vary.
  7. If you made a contribution to your IRA during the year – but now you need the money back – you’re also in luck. Contributions returned before the due date of your tax return can be withdrawn without penalty. You’ll need to take out the contribution as well as any interest or dividend earned. Of course, if you take it back, you can’t claim a deduction for the initial contribution on your return.
  8. Food stamps and other forms of public assistance that might be available to you are generally not taxable. Don’t be afraid or embarrassed to ask about benefits. Temporary programs like Supplemental Nutrition Assistance Program (SNAP), WIC (Women, Infants, and Children), and those offered through TANF (Temporary Assistance for Needy Families) can help put food on the table for your family while you continue to look for work.
  9. If you’re now responsible for paying your own health care, you may be able to deduct the cost of those insurance premiums, including COBRA costs, as medical expenses. You would include the costs of those premiums along with your other eligible medical expenses on Schedule A if you itemize. Keep in mind that those expenses are only deductible to the extent that they exceed 10% of your adjusted gross income. Here’s a quick example: Let’s say your medical expenses total $4,500, and your AGI is $20,000. You can deduct $2,500 of medical expenses: $4,500 (total expenses) less $2,000 (10% of $20,000). And don’t forget that you can use an established health savings account (HSA) to pay medical expenses: the money in the account is yours, even if you lose your job.
  10. Don’t overlook available tax credits that you didn’t qualify for when you were working. Even though your income may have exceeded the threshold for the Earned Income Tax Credit (EITC or EIC) in prior years, you may now be eligible for the credit. Assuming you meet the earned income restrictions and other criteria, you may qualify for the EITC – and you don’t have to have kids to collect. Bonus: it’s refundable so you can get a check even if you didn’t owe any tax.
  11. If you’re relying on the kindness of strangers – or friends and family – to get through this tough time, those gifts probably aren’t taxable to you. As a rule, the person making the gift – not the recipient – is responsible for any applicable federal gift taxes. For federal income taxes, the mere receipt of the gift is not a taxable event. Just keep in mind that the underlying gift keeps its taxable character, so if it’s throwing off interest, for example, that interest would be taxable to you.

If all of this seems a bit overwhelming, remember that help is available. Don’t be afraid to ask questions about benefits, deductions, and credits that can help reduce your tax burden at tax time. Ask your tax professional for help or contact the IRS for assistance.

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Author

Kelly Erb is a tax attorney, tax writer and podcaster.

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