Tax Q&A: Stimulus Payments and Unemployment Benefits
With the spread of the COVID-19 pandemic throughout the United States and around the world, 2020 has been an unprecedented year, leaving many of us wondering about finances and potential tax ramifications. The $2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act) contained various provisions to support individuals and businesses dealt a financial blow during the crisis. Below is a Q&A primer addressing some of the more common concerns regarding the taxability of two of the provisions – stimulus payments and unemployment compensation – included in the relief package.
Q: Will stimulus payments be taxable to me?
A: As part of the CARES Act, millions of Americans received the Economic Impact Payments (stimulus payments). These payments are not taxable to you. Per the IRS, the payments are not included in your gross income; therefore, they are not part of your taxable income, and you will not pay income tax on them.
Q: Will my accountant ask me next tax season how much I received as a stimulus payment? Do I need to keep any documentation?
A: Approximately 15 days after the stimulus payment was made to you, the IRS mailed a notice regarding the payment. Keep this notice with your tax records. The IRS has not yet provided guidance on what actions you will need to take when you file your 2020 tax return.
Q: Are unemployment benefits taxable to me?
A: Generally, all unemployment benefits paid to you by state or federal governments are taxable at the federal level. It varies at the state level – New Jersey and Pennsylvania do not tax unemployment benefits, but New York does. In addition to your state unemployment benefits, you may have also received an extra $600 per week from the federal government under the Federal Pandemic Unemployment Compensation program of the CARES Act. These benefits are also taxable, similar to other unemployment benefits.
Q: Should I be having taxes withheld from my unemployment benefits? What should I do if I didn’t?
A: This is up to you – you have the option to have 10% of your unemployment benefits withheld for federal income tax purposes. Choosing to have the tax taken out now helps offset any potential future tax liability, but it also means your benefits will be less. If you want to change your withholding status, you can do so in writing in New Jersey or through your online portal in Pennsylvania and New York. If you don’t voluntarily have taxes withheld from your benefits, you have a couple of other options – save the money or pay estimated quarterly taxes. It’s a good idea to consider all your options – you don’t want to be surprised by a big tax bill next year.
Q: Will I get a tax form at the end of the year for my unemployment benefits?
A: Yes. You will receive a Form 1099-G from your state; you will need this in filing your federal income tax return. Form 1099-G shows the number of benefits obtained and the amount of tax withheld. If you do not receive Form 1099-G in the mail, you will need to access and download a copy from your unemployment portal.
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If you have any questions concerning the material discussed above or need assistance with another tax-related issue, Klatzkin can help. For additional information, click here to contact us. We look forward to speaking with you soon.
Angela Lawrence, Quality Control Coordinator at Klatzkin, contributed to this post.
The above represents our best understanding and interpretation of the material covered as of the date of this post. The content should not be construed as accounting, tax, or financial advice.