Unemployed or Furloughed During COVID? You May Need Tax Relief Help this Year
Taxpayers who received unemployment benefits or dug into retirements might be in for a surprise when tax time rolls around. Tax relief help could be the answer for those who may unexpectedly owe income tax come April 15, 2021.
Getting to the Heart of the Problem
The COVID-19 pandemic has led to an unprecedented number of people getting laid off or furloughed from their jobs. With the national unemployment rate soaring to 14.7% in April, more people have been put out of work than have been since the Great Depression in the 1930s. At various points during the COVID crisis, Nevada experienced some of the highest unemployment rates in the United States.
For those who have never collected unemployment insurance before, it can be easy to overlook that they must pay taxes on unemployment income. The money received via an unemployment check must be reported when filing federal income taxes like any other type of income. It is possible to request that 10% of unemployment income be withheld for federal income taxes when filing, however.
Adding to the tax problems for many is the additional $600 and $300 per week provided under the Coronavirus Aid, Relief, and (CARES) Act that is separate from unemployment insurance. Taxes are not withheld from that amount. However, it is considered taxable income when filing federal income taxes. Fortunately, because there is no state income tax in Nevada, state taxes will not be owed on this income or regular unemployment income.
What About Early Withdrawals on Retirement Funds?
Under normal circumstances, taxpayers would be taxed and be subject to penalties for making early withdrawals from certain retirement accounts. The Cares Act gives taxpayers up to three years to pay those taxes and receive a refund on taxes paid on that money if they redeposit the money within three years. The 10% early withdrawal penalty and 20% federal withholding on distributions are waived for those who have or have a dependent that tested positive for COVID-19. Penalties will also be waived for those who experienced financial difficulties due to being laid off or working reduced hours as a result of COVID-19.
Heading Off a Widespread Problem
Taxpayers who have not set aside money to pay the taxes that will be due when they file their federal taxes may find themselves in a financial bind. Depending on their individual tax situation, they could potentially owe hundreds or thousands of dollars when they file in April 2021. They might also be subject to underpayment penalties if they owe more than $1,000 in federal income tax.
It is a good idea for taxpayers who think they may be in tax trouble to act before tax day arrives. When possible, making estimated tax payments could help make up for the withholding deficiencies. Other tax relief help to consider would be setting up a payment plan or in cases of extreme financial difficulties, making an offer in compromise.