Filing Taxes Unemployed – The Complete Guide In 2021

Due to COVID-19, there are record numbers of people filing for unemployment compensation. It may surprise you to learn that you still need to pay income taxes on this money.

That’s right – your tax return needs to include any unemployment compensation you receieved throughout the calendar year. COVID-19 has required more citizens than ever to file for unemployment benefits – but Uncle Sam still requires his cut.

In the article below, we’ve researched and covered the most frequently asked questions about filing taxes while unemployed. Taxpayers must file every dollar earned with the IRS – so don’t skimp on your unemployment benefits.

If I’m Unemployed, Do I Have To File Taxes?

The short answer here is yes, you do have to file taxes with the IRS – even if you’re unemployed. The longer answer is that if you earn under $12,400 a year – you do not have to file.

If you somehow have absolutely no taxable income whatsoever to file (including unemployment) – your tax return will likely be rejected by the IRS. If you are married, the threshold to file is a combined $24,800.

How Do I File Unemployment Taxes?

A specific document, Form 1099-G, will show you the total amount of income you need to report to the IRS. This form is used specifically for unemployment income.

Any other forms will also need to be used, such as W-2s from former employers.

Do States Make You Pay Taxes On Unemployment Income?

Most states also require that you file taxes on any unemployment benefits you receive. The only way around this is to not meet the threshold of total taxable income for the year.

If you expect to be receiving unemployment compensation for a long period of time, you can fill out Form W-4V. This lets you request a certain amount be withheld from all of your unemployment checks.

Are There Any Tax Breaks For Unemployment Compensation?

There are a few different tax breaks for those collecting unemployment benefits. The first is the EITC (earned income tax credit).

If you have low (or even moderate) income, you may qualify for this credit. You can receive up to $6,000, so be sure to research this credit if you think you may fit the bill.

If you have a small gig as a job (like driving for Lyft or Uber) – you may actually file as self-employed. This comes with its own benefits.

Another possible tax break could be qualifying for the Child Tax Credit. This is worth $2,000 per child, and is available if you have any dependents under the age of 17.

Even if you have a dependent over 17, you may be eligible for a smaller credit of $500. However, your children will have to meet certain requirements, in order to qualify for these credits.

It should be noted that for both the childcare credit and the earned income tax credit, you’ll have to report other income besides unemployment. In essence, you must be either looking for work, or have fairly recently lost your job, in order to get one of these credits.

Another possible credit comes in the form of the Child and Dependent Care Credit. In some cases, up to 1/3rd of your child’s expenses could be covered by this credit.

Unemployment Compensation – Explained

If you lose your job, unemployment compensation is given to you by the federal (and/or state) government. This is money that still needs to be reported by the IRS, but otherwise does not need to be given back.

It is designed to help support employees who have lost their jobs (usually through no fault of their own). If you want to receive these benefits, you need to apply through your state’s program.

What Percentage Of Taxes Do You Pay On Unemployment?

There is a flat federal tax rate of 10% on unemployment compensation. You may also qualify for deductions like the earned income tax credit, and unemployment compensation is not otherwise withheld in any manner.

Who Pays For Unemployment Benefits?

In short, the average taxpayers who file their income tax with the IRS every year – are the ones paying for unemployment benefits. The irony of working – in order to pay for those who are not working – is not lost on many citizens.

How To Avoid Being Audited With Unemployment Benefits

If you want to avoid being audited, it’s important to report accurately on your yearly tax returns. If you don’t file your taxes at all, the IRS may perform an audit.

Typically, there is a three year statute of limitations when it comes to auditing taxpayers – but this is waived if you never file your taxes at all. We recommend keeping any relevant financial documents for at least a few years, just in case an audit occurs.

If you are receiving very little income (or you are on unemployment) – you are less likely to be audited. Simply put, the less money you make, the less likely you are to make an error on your taxes.

Other Factors To Consider

Being unemployed does not mean you gain eligibility to not file any federal income taxes. Even the coronavirus did not wipe out the need for every citizen to pay their taxes.

While your gross income falls when you are unemployed, you still need to pay taxes on your unemployment income. We recommend hiring a tax professional or qualified accountant when it comes time to file your taxes – even if you are unemployed.

That’s because they may find deductible items that you could miss, and they may also be able to work out a payment plan with the IRS, should you need one. Tax preparation (at least when it is done properly) is not as easy as simply using TurboTax or other software – you don’t want to have a tax liability, if at all possible.

This is doubly true if you have to worry about a job search, and if you’re too young to be getting social security or medicare. We become very used to those bi-weekly direct deposit payments from our job, so if you become unemployed, you will quickly need to find a new employer.

If you’re unemployed, you might be paying less of your income to Uncle Sam – but any loss of income will hurt you more, compared to wealthy taxpayers. Unemployment benefits will only take you so far, and you actually can’t earn above a certain amount while still collecting unemployment.

The Bottom Line On Filing Taxes Unemployed

Even the wealthiest filers still need to pay their taxes – and the same goes for those of us who have the bad luck to find ourselves unemployed. The pricing and percentage of our income going to Uncle Sam may differ, but it’s still every citizen’s duty to pay their taxes.

As always, we recommend hiring a qualified accountant, or tax professional, when it comes time to file your taxes. They will have more experience, which not only leads to less possible taxes paid by you – it eliminates any chance of mistakes being made, which would typically result in monetary fines.

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