If you have been made redundant due to the coronavirus or have been unemployed for other reasons this year, you may not fully understand the tax implications of this change in employment status.
If you are unemployed and owe a tax refund, an early refund can help you until you find a new job.
Be aware that unemployment benefits are taxable
In general, all unemployment benefits you receive are taxable.
While you typically withhold federal taxes on unemployment, it is worth checking that you are withholding enough as your tax bracket will affect whether you will be under or over withheld.
The income from the termination of the employment relationship is also taxable
In addition to paying taxes on unemployment benefits, you must also pay taxes on any termination income that you have received.
The severance payment – including the payment for unused vacation or sick days – is fully taxable for you in the year in which you receive it. These amounts are included on the form that your previous employer gave you.
If you took up contract work while you were unemployed, you should be aware of how this will change your tax situation
Maybe you did contract work or started a part-time gig to make ends meet between full-time work. It is important to understand how this income is taxed – and the potential tax benefits of working as an independent contractor. If you have started another job as a self-employed entrepreneur or were self-employed, you must also pay tax on this income.
You cannot deduct the cost of finding a job
If you were hoping to deduct the cost of finding a job, you are out of luck.
Unfortunately, job search costs such as travel and placement fees are no longer deductible.
If you can’t pay all of the taxes due, consider an installment payment plan
Paying taxes you owe can be difficult if you are still unemployed on tax day. Fortunately, you have repayment options.
If you are unable to pay your taxes when filing your tax return, be aware that you can enter into installment arrangements with the IRS to pay your taxes due over time. The application process is usually straightforward. It is better to file your tax return and enter into an installment payment agreement than not to file your tax return at all, as not filing penalties can be very serious.