How will stimulus payments and unemployment affect your 2020 taxes?

How will stimulus payments and unemployment affect your 2020 taxes?

You may be asking yourself: Am I going to be taxed on the federal aid I have received in 2020? 

Southland has put together a quick guide that will hopefully answer many of your questions regarding how stimulus payments and unemployment may affect your taxes next year. 

In regard to the stimulus payment checks you may have received this year, you will not be taxed on those. Stimulus money is not considered taxable income. The check will not increase the amount you owe when you file your 2020 or 2021 federal tax return and it will not decrease your refund for the 2020 and 2021 tax year. 

For more information on stimulus payments, read the Southland blog here

On the other hand, unemployment is considered taxable income. This means, any unemployment you may have received in 2020 will be taxed. This includes both state unemployment benefits, as well as the additional $600 per week in coronavirus relief that was provided through the CARES Act.  

Unemployment recipients may end up paying penalties and interest if they aren’t paying the appropriate amount on their taxes. 

Use these three strategies to avoid having to owe the government on your taxes next year

1. Ask to have taxes withheld 

When you apply for unemployment through your state, you can ask to have 10% of your payments withheld to cover federal income taxes. This a great strategy to avoid overspending this year and having to owe next year. 

However, even if you have already begun receiving benefits, you can fill out an IRS W-4V Voluntary Withholding Request, to adjust your withholding at any time. 

2. Pay estimated taxes 

If you don’t have your income taxes withheld, you could pay estimated taxes every quarter. This option may not work for everyone, but it could be beneficial for small business owners or those who are self-employed. 

3. Save part of your payment 

To save what you might owe in taxes, you can put aside at least 10% of each benefit payment. Although it might be hard to save some of your employment during this challenging time, it is important to set up some flexibility for next year’s tax bill. 

We hope this information helps you and brings you some security during this unpredictable year. If you have more questions about your taxes, we recommend speaking to a certified public accountant (CPA). A certified tax professional can consult with you one-on-one and address your specific tax needs. 

The team here at Southland is also here for you! Contact us if you need assistance with loans, financial guidance, creating an emergency fund, and more. 

Sources: ExperianCNBC, and IRS.