NATIONWIDE — Tax season is always stressful, particularly for those without a dedicated accountant, the means to pay for professional assistance, or a very good idea how their taxes work in general.
For another year in a row, the coronavirus pandemic is, ahem, compounding that stress. More than 70 million Americans filed for unemployment benefits last year, and the IRS approved some 160 million direct payments in two stimulus packages during 2020. Many who received either or both of these financial aids last year are still wondering whether they’re taxable, or exactly how to include them on their income tax returns – and that uncertainty, coupled with the government’s decision to push the tax deadline back to May 17, has more people than ever procrastinating.
What You Need To Know
- Unemployment compensation and stimulus payments should be included on 2020 federal income tax returns
- Including those payments is easy, whether filing online or on paper
- The 2020 tax deadline has been pushed back to May 17
If you received unemployment compensation or a stimulus payment last year, and have been avoiding filing your income taxes so far this year because you’re not sure exactly how it works, fear not. Making sure you’re covered this tax season can be as easy as filling in a few extra lines on your return.
Yes, unemployment benefits are considered taxable income. However, the most recent stimulus bill signed into law by President Joe Biden makes up to $10,200 of unemployment compensation received last year tax-deductible, provided the individual who received the benefits had a gross adjusted income of less than $150,000 in 2020.
“[The individual is] going to enter the entire amount that is shown on that 1099-G,” says McDuffie. “So even if you receive a 1099-G that is more than that amount you're still going to input the entire amount. So for example if it's $15,000 you still want to enter the whole $15,000.”
If you’re filing your taxes electronically, you’ll add the information from the 1099-G form where you input all of your sources of income. McDuffie says the IRS is working with the various tax software companies on updates that will automatically recognize the $10,200 deduction.
“Now, if you’re filing on paper, the entire amount is going to be included on Schedule 1 Line 7 [of the 1040 tax form], she adds. “When you get to Line 8 [which represents additional taxable income], what you’ll do is reduce that number by the $10,200.”
If you’ve already filed a federal tax return for 2020 and did not follow this procedure for unemployment compensation, don’t panic. The IRS requests that you don’t file an amended return – they will work with you on any needed adjustments.
When it comes to stimulus checks, those payments are not considered taxable income. Technically, those payments are advance credits on your taxes, determined by information from your past tax returns and known in legalese as Recovery Rebate Credit.
“When the taxpayer files their 2020 tax return, if the question is asked whether or not you received your first stimulus payment, and if so how much, and then also if you've received your second stimulus payment ... they're asking that question, not because the money is taxable but because of the fact that if there's any adjustments that need to be made, they can make the adjustments on your 2020 taxes,” McDuffie says.
Filing your federal income tax return during the pandemic doesn’t have to be a cold sweat-inducing exercise. If you have the means, though, it’s always a good idea to engage the services of a professional. And even if you don’t, the IRS’s Volunteer Income Tax Assistance (VITA) program helps provide free tax preparation help for those who make $57K or less per year in communities across the nation through municipalities and organizations like the United Way.