While many unemployed individuals are grateful for the additional $600 in federal unemployment, many are wondering if these additional funds will have any adverse impact on their 2020 tax return. Unfortunately, the $600 in additional federal unemployment is taxable and will be taxed as ordinary income on taxpayer’s 1040 returns.
Many taxpayers are in for a rude awakening come next April when they face a substantial tax bill on their state and federal unemployment benefits. Although state unemployment agencies give taxpayers the option to have taxes withheld from their unemployment benefits it’s unlikely that many taxpayers will choose this option.
Is the Stimulus Check Taxable?
Unlike the additional federal unemployment of $600 the $1,200 stimulus check is not taxable and will not have to be paid back on your 2020 return. There was a rumor going around that the $1,200 stimulus check would have to be paid back but, as we previously reported here, the stimulus check will not have to be paid back nor will it reduce your 2020 refund.
Given that many unemployed taxpayers may not withhold on their unemployment benefits and therefore will receive a smaller refund come 2021, they may wrongly assume that the stimulus check reduced their refund.
What Are My Options?
If you are currently collecting unemployment and are worried about your 2020 tax liability then it’s never too late to start withhold on your benefits. Additionally, taxpayers may choose to withhold extra on their W4s once they regain employment and start collecting a paycheck.
The information contained herein is is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined though consultation with your tax adviser. This article represents the views of the author only and does not necessarily represent the views or professional advice of this publication or the author’s employer.