Why unemployed Americans may owe the IRS next year

You can take steps to avoid a surprise tax bill if you are collecting unemployment

Millions of Americans have lost their jobs during the coronavirus pandemic – and many who are claiming unemployment benefits may be faced with a surprise tax bill next year.

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The IRS requires people to report income received in the form of unemployment. Some states tax benefits, too.

However, when you receive unemployment there’s typically no withholding, meaning individuals have to choose to have taxes withheld.

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And even then, it’s usually at a rate of 10 percent, which may not be enough for some people who have been receiving expanded unemployment benefits.

“Unemployment withholding may not cover their actual tax liability,” Eric Bronnenkant, Head of Tax at Betterment, told FOX Business. “That $600 essentially allowed people to make more money on unemployment [than working, so] 10 percent is even less likely to cover their actual tax.”

Additionally, Bronnenkant noted that people may choose not to have any money withheld because they need as much cash as possible for essential expenses.

Others may look at it as a “next year problem,” he added.

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How prominent this issue will be next tax season depends on the future of the U.S. economy and the extent to which lawmakers decide to renew the expanded unemployment benefits in pending relief legislation.

The additional $600, which was a policy under the CARES Act, expired at the end of July. The number of people receiving benefits was about 16 million as of July 25.

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But the tax issue stands to be problematic for many, especially those who are collecting benefits for the first time.

According to a recent survey, 37% of Americans thought unemployment compensation was not considered taxable income.

More than half of respondents did not know that they had to request to have taxes withheld from unemployment compensation.

If you do not have taxes withheld from your checks, you may have to make quarterly estimated payments to the IRS. These payments are typically required of individuals who expect to owe tax of $1,000 or more when their return is filed.

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