How to Avoid a Tax Bill After Collecting Unemployment

Statistics indicate that more than 24 million people in the United States will receive unemployment in 2021. Approximately 60% of recipients opted out of having taxes withheld from their earnings.

The federal government considers unemployment benefits as income. Thus depending on the amount of money provided, recipients are expected to report their earnings and pay taxes according to the annual rate schedule. Depending on the state in which a filer lives, individuals may or may not have to pay state taxes on unemployment earnings.

No 2021 Federal Tax Break When filing annual income taxes, bonuses, salaries, wages, and unemployment benefits are all considered income and must be reported. In the way taxes are normally withheld from wages, individuals had the option of having taxes withheld from their unemployment income. Some choose to make estimated tax payments quarterly. Others might pay the taxes in one lump sum when filing taxes.

As part of the American Rescue Plan, for the tax year 2020, the federal government did not consider the first $10,200 of unemployment as taxable income. The tax break applied to singles or couples who had an annual income that did not $150,000. Unfortunately, the break was not extended for the 2021 tax year.

Filers experiencing financial difficulties that interfere with their ability to pay income taxes have options. The IRS is willing to work with individuals by creating a payment plan. But, taxes not paid on time incur interest fees. There are also certain stipulations applied in which individuals are not susceptible to penalties.

Unemployment Taxes by State Of all the 50 United States, 17 do not require filers to pay taxes on unemployment benefits. States not having any income taxes include: • • • •

Alaska Nevada Texas Wyoming

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Florida South Dakota Washington

States that require income taxes based on investment income:

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New Hampshire Tennessee

States that do not tax unemployment income: • • •

Alabama Montana Pennsylvania

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California New Jersey Virginia

States that may require taxes paid on a portion of unemployment income:

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Indiana Wisconsin

Anyone not living in one of the above states must pay taxes on employment benefits received. As with federal tax options, residents have the option of having the taxes withheld, paid quarterly, or paid in one lump sum.