Taxes on Unemployment

[happystuff]

Just an fyi for anyone who had received unemployment, including the bonus $600 per week, I got an email about filing. It says, in part:

You are responsible for paying federal income taxes on any < my state> Unemployment Insurance benefits you received in 2020. The attached file (1099-G) includes the amount of unemployment benefits you collected and what amount, if any, was withheld from your benefits for tax purposes.

If you received Unemployment Insurance, Pandemic Unemployment Assistance, Pandemic Emergency Unemployment Compensation or Extended Benefits, you may have chosen to withhold 10% of your benefits for tax purposes. That option was not available for the supplemental $600 Federal Pandemic Unemployment Compensation (FPUC) or $300 FEMA Lost Wages Assistance payments. You are responsible for paying any required federal taxes on any unemployment compensation payments you received in 2020.

I had a feeling, so I'm glad I saved as much of the extra as I did.

[catherine]

Yeah, when DS applied for unemployment I advised him to select the option of having a portion deducted for taxes so he wouldn't have to worry about it if things were still tight for him in April 2021. Even though he also saved a good bit of the money and would be able to pay his taxes, he feels better knowing he still gets to keep the stash he's got. He may even get a refund.

[happystuff]

I had withholding on the regular, but it is the "bonus" payments - where there was no option for withholding - that I worried about. That really did end up being a lot of money, so I'm not quite sure if I'll owe or the regular withholding will be sufficient coverage.

[catherine]

I had withholding on the regular, but it is the "bonus" payments - where there was no option for withholding - that I worried about. That really did end up being a lot of money, so I'm not quite sure if I'll owe or the regular withholding will be sufficient coverage.

Oh, I'm not quite sure what DS did about that. I never thought it made much sense to tax unemployment benefits anyway.

[Tradd]

Anyone who is smart about it, will have the taxes taken out from each unemployment check. That’s what I did.

Ugh. Just read it was for the extra $600. Which I got for every week I was out of work. Yuck.

[ApatheticNoMore]

When I collected unemployment I had taxes taken out of most of the unemployment checks, sometimes I just wanted the extra $100. I got all the money back anyway, so that was kind of pointless to withhold in the end it turned out. That's what happens when you are unemployed 11 months and only end up working like 2 1/2 months a year (that year), you get all the taxes you paid back anyway.

[jp1]

When I was on unemployment in NY state 20 years ago they were very upfront about the fact that it was federally taxable income. I still chose to not have tax withheld because at the end of the day being able to pay my rent currently was a bigger concern than having a small tax bill eight months down the road.

[GeorgeParker]

Anyone who is smart about it, will have the taxes taken out from each unemployment check.

If they withhold income tax on your unemployment checks, you're giving the government an interest free loan.

If you're really worried about having enough money to pay the income tax when it comes due, set aside 10%-15% of your unemployment check in a savings account as each check arrives. That way you have the cash available for emergencies and you're earning interest on the savings account instead of lending your money to the government for free. {Your income tax withholding rate may be higher or lower. Base it on a recent paycheck.}

I was always baffled by my co-workers who would brag about getting a $300-$500 income tax refund. Especially if they knew they could reduce the amount being withheld from their paycheck but wouldn't do it because they were treating income tax withholding like an automatic savings account.

[Tradd]

If they withhold income tax on your unemployment checks, you're giving the government an interest free loan.

If you're really worried about having enough money to pay the income tax when it comes due, set aside 10%-15% of your unemployment check in a savings account as each check arrives. That way you have the cash available for emergencies and you're earning interest on the savings account instead of lending your money to the government for free. {Your income tax withholding rate may be higher or lower. Base it on a recent paycheck.}

I was always baffled by my co-workers who would brag about getting a $300-$500 income tax refund. Especially if they knew they could reduce the amount being withheld from their paycheck but wouldn't do it because they were treating income tax withholding like an automatic savings account.

Really? Here in IL, my state unemployment was $384/week. I was very fortunate to get the $600/week.

If all you’re getting is $384/week, do you really think people are going to put aside money for taxes if they’re worried about paying rent and such?

[catherine]

If all you’re getting is $384/week, do you really think people are going to put aside money for taxes if they’re worried about paying rent and such?

Exactly. Of course it's the sensible idea, but having been in the crapper and on unemployment myself, I know that you need every scrap of money that falls into your lap. Then when you get on your feet and are maybe better off at tax time, the tax bill can be a real burden. That's why I feel the government should just send you the money tax free, even if it's a reduced amount. Yes, some will feel it's treating adults like children and being NannyG, but when you are unemployed, you are desperate, and when you are desperate you don't always make the "wise" decision. You make the decision that is going to fill the greatest needs of the day.

[GeorgeParker]

Really? Here in IL, my state unemployment was $384/week. I was very fortunate to get the $600/week.

If all you’re getting is $384/week, do you really think people are going to put aside money for taxes if they’re worried about paying rent and such?

I too have been unemployed, and I got less than $348 per week. Given a choice between withholding or not withholding. I chose to not withhold because I'd rather earn interest on that money instead of lending it to the government for free.

My opinion has nothing to do with the extra covid unemployment payments. I'm talking about the smart thing to do with any income where you have the option to withhold or not withhold taxes.

It is always better to receive interest than to loan money to someone for free. Period. If a person doesn't have the willpower to stash that tax money in a savings account, then to thine own self be true and let the government withhold it. But that isn't the smart thing to do.

As far as people with small unemployment checks needing to have the income tax withheld because if they have it in their hand they'll probably spend it instead of saving it: Which is better: to buy food and pay your rent, or to give the government an interest-free loan and go hungry?

Imho it is better to have enough money to pay rent and buy food and pay for other necessities, even if you end up owing more income tax than you can pay and having to pay the relatively low interest rate the IRS charges you for not paying your taxes on time.

To be clear about my intention: When you say "Anyone who is smart about it will have the taxes taken out" what that really means is anyone who doesn't have income tax withheld is being dumb. Well, I am not dumb, and imho it is smarter to not have income tax withheld if you have that option. YMMV

[happystuff]

I too have been unemployed, and I got less than $348 per week. Given a choice between withholding or not withholding. I chose to not withhold because I'd rather earn interest on that money instead of lending it to the government for free.

My opinion has nothing to do with the extra covid unemployment payments. I'm talking about the smart thing to do with any income where you have the option to withhold or not withhold taxes.

It is always better to receive interest than to loan money to someone for free. Period. If a person doesn't have the willpower to stash that tax money in a savings account, then to thine own self be true and let the government withhold it. But that isn't the smart thing to do.

As far as people with small unemployment checks needing to have the income tax withheld because if they have it in their hand they'll probably spend it instead of saving it: Which is better: to buy food and pay your rent, or to give the government an interest-free loan and go hungry?

Imho it is better to have enough money to pay rent and buy food and pay for other necessities, even if you end up owing more income tax than you can pay and having to pay the relatively low interest rate the IRS charges you for not paying your taxes on time.

To be clear about my intention: When you say "Anyone who is smart about it will have the taxes taken out" what that really means is anyone who doesn't have income tax withheld is being dumb. Well, I am not dumb, and imho it is smarter to not have income tax withheld if you have that option. YMMV

Glad this method works for you! But please remember that everyone isn't you and it may not be what others consider their best method at the time they are deciding.

[GeorgeParker]

Glad this method works for you! But please remember that everyone isn't you and it may not be what others consider their best method at the time they are deciding.

This thread is a conversation in which people are expressing opposing opinions on the topic of income tax withholding. I enjoy such conversations because I believe in free speech and I enjoy openly discussing opposing viewpoints so that people can decide for themself what to do. Nothing I have said in this thread has in any way implied that anyone has to do it my way. All I've done is politely express my opinion that not withholding is smarter than withholding. Sorry if you don't see it that way, but my opinion is what it is and I reserve the right to politely try to convince other people that I'm right.

[jp1]

The reality is that for different people different choices in this situation will make sense. If one is living "on the edge" financially it may be reality that they need to not have tax withheld from unemployment because they need that money to pay the rent and buy food. They won't be setting aside money for the inevitable taxes which is not great because they'll have a big tax payment come due the following April. But starving or being homeless is also not a great option so perhaps choosing the "least worst" option makes sense for them. Others may know themselves well enough to know that if they don't have taxes withheld they will fritter away the money and also have a big tax payment come due. And still others will have sufficient control over their finances and also enough of a stash that they can not have taxes withheld, invest that money, and easily make the tax payment in April. None of these people are dumb or smart, they are making a decision based on their personal situation. The only situation where someone would be acting "dumbly" would be someone who didn't need the extra money, but still chose to not have taxes withheld and then frittered it all away on gazingiss pins or other non-essentials and didn't have the money to pay the taxes when April rolled around.

[Teacher Terry]

George, we debate stuff all the time on this forum. There’s very little interference from the moderators.

[ApatheticNoMore]

I've collected unemployment twice in my life (there was also a time I was unemployed and wasn't eligible as I quit - a bad situation I quit but). It has never been enough to live off of (hahaha you have to be kidding - possibly if I had gone without health insurance it would be closer to enough and still fall short. Yea unemployment it helps, but you can't live off it).

So both times I lived off unemployment plus savings. So taking a bit more out of savings or getting the bigger unemployment check without withholdings, the bigger unemployment check maximizes interest. But big tax bills are pretty stressful so I try to avoid them and interest rates are low and have been for ages especially in recessions (it's still interest so it still makes sense to try to get more, it's just not much).

[GeorgeParker]

The only situation where someone would be acting "dumbly" would be someone who didn't need the extra money, but still chose to not have taxes withheld and then frittered it all away on gazingiss pins or other non-essentials and didn't have the money to pay the taxes when April rolled around.

That's the most intelligent and reasonable thing I've read in this thread. Thank you. I agree completely and wish I had said it.

[iris lilies]

The reality is that for different people different choices in this situation will make sense. If one is living "on the edge" financially it may be reality that they need to not have tax withheld from unemployment because they need that money to pay the rent and buy food. They won't be setting aside money for the inevitable taxes which is not great because they'll have a big tax payment come due the following April. But starving or being homeless is also not a great option so perhaps choosing the "least worst" option makes sense for them. Others may know themselves well enough to know that if they don't have taxes withheld they will fritter away the money and also have a big tax payment come due. And still others will have sufficient control over their finances and also enough of a stash that they can not have taxes withheld, invest that money, and easily make the tax payment in April. None of these people are dumb or smart, they are making a decision based on their personal situation. The only situation where someone would be acting "dumbly" would be someone who didn't need the extra money, but still chose to not have taxes withheld and then frittered it all away on gazingiss pins or other non-essentials and didn't have the money to pay the taxes when April rolled around.

I think most of us can name several people in our sphere who use their government IRS refund as a savings account. Or view it as a windfall. It is not at all unusual.

[happystuff]

This thread is a conversation in which people are expressing opposing opinions on the topic of income tax withholding. I enjoy such conversations because I believe in free speech and I enjoy openly discussing opposing viewpoints so that people can decide for themself what to do. Nothing I have said in this thread has in any way implied that anyone has to do it my way. All I've done is politely express my opinion that not withholding is smarter than withholding. Sorry if you don't see it that way, but my opinion is what it is and I reserve the right to politely try to convince other people that I'm right.

Same here, so go for it.

Edited to add: except for the "try to convince other people that I'm right". In my opinion, expressing my opinion and listening to others' opinions is an exchange, a conversation; I try my best (admittedly not always successful - but I'm trying!) for it not to be an "I'm right and you're wrong" issue.

[GeorgeParker]

except for the "try to convince other people that I'm right". In my opinion, expressing my opinion and listening to others' opinions is an exchange, a conversation; I try my best (admittedly not always successful - but I'm trying!) for it not to be an "I'm right and you're wrong" issue.

Whether it's a discussion of plan-A vs plan-B, or where to eat lunch, or which method is the best way to do something, every conversation that involves two different opinions is an effort by each person to convince the other person that they're right. If you don't think you're right or if you don't think you can get the other person to consider the possibility that you're right, then there's no point in having the conversation.

Often a conversation will result in two people finding a common ground where their opinions overlap, but just as often the conversation will end with one person saying "Obviously we disagree about this" and changing the subject. Both results are ok.

IMO 25% of what I know is either stuff I learned from research I did in order to defend, or try to defend, something I believed, or it's based on valid arguments that someone used to refute my beliefs during a casual conversation. And that is how it should be.

If what you believe isn't worth defending, why waste time talking about it?

[happystuff]

Whether it's a discussion of plan-A vs plan-B, or where to eat lunch, or which method is the best way to do something, every conversation that involves two different opinions is an effort by each person to convince the other person that they're right. If you don't think you're right or if you don't think you can get the other person to consider the possibility that you're right, then there's no point in having the conversation.

Often a conversation will result in two people finding a common ground where their opinions overlap, but just as often the conversation will end with one person saying "Obviously we disagree about this" and changing the subject. Both results are ok.

IMO 25% of what I know is either stuff I learned from research I did in order to defend, or try to defend, something I believed, or it's based on valid arguments that someone used to refute my beliefs during a casual conversation. And that is how it should be.

If what you believe isn't worth defending, why waste time talking about it?

And I guess that is the difference between us - I don't go into conversations like they are a battle to "win" or "lose" or even to "defend" or convince someone that "I'm right" about something. I converse to learn about people, what they think, what they have to say, differing opinions/ideas/etc and to share my own opinions, thoughts and beliefs. I try to respect other people to have their own opinions without trying to "convince" them of something. That is not a waste of time for me. So, now that I understand how and why you engage in conversation, thank you for the explanation/discussion and have a nice day. :)

[GeorgeParker]

I converse to learn about people, what they think, what they have to say, differing opinions/ideas/etc and to share my own opinions, thoughts and beliefs. I try to respect other people to have their own opinions without trying to "convince" them of something. That is not a waste of time for me.
It sounds to me like we both approach conversations exactly the same way, it's just that I'm more conscious of wanting to either teach something or learn something or at least exchange enough information to make both of us think more deeply about the subject. To me, shallow conversations about nothing in particular are ok and a social necessity, but they're not my cup of tea.
Go in peace, live long, and prosper.:)

[Accrual World]

I too have been unemployed, and I got less than $348 per week. Given a choice between withholding or not withholding. I chose to not withhold because I'd rather earn interest on that money instead of lending it to the government for free.

My opinion has nothing to do with the extra covid unemployment payments. I'm talking about the smart thing to do with any income where you have the option to withhold or not withhold taxes.

It is always better to receive interest than to loan money to someone for free. Period. If a person doesn't have the willpower to stash that tax money in a savings account, then to thine own self be true and let the government withhold it. But that isn't the smart thing to do.

As far as people with small unemployment checks needing to have the income tax withheld because if they have it in their hand they'll probably spend it instead of saving it: Which is better: to buy food and pay your rent, or to give the government an interest-free loan and go hungry?

Imho it is better to have enough money to pay rent and buy food and pay for other necessities, even if you end up owing more income tax than you can pay and having to pay the relatively low interest rate the IRS charges you for not paying your taxes on time.

To be clear about my intention: When you say "Anyone who is smart about it will have the taxes taken out" what that really means is anyone who doesn't have income tax withheld is being dumb. Well, I am not dumb, and imho it is smarter to not have income tax withheld if you have that option. YMMV

Absolutely agree on this point and, as a tax professional, this is the advice I give most friends when they do their withholdings. Getting a refund is not "winning"

Especially for people that are struggling to get by. Every dollar received sooner in the year allows for more flexibility so that you don't end up borrowing and paying interest.

I always owe money when I file my taxes. As long as you're above the safe harbor to avoid an underpayment penalty (the lesser of 90% of taxes due current year or 100% of taxes owed prior year), you're good.

[Tradd]

Just an fyi for anyone who had received unemployment, including the bonus $600 per week, I got an email about filing. It says, in part:

You are responsible for paying federal income taxes on any < my state> Unemployment Insurance benefits you received in 2020. The attached file (1099-G) includes the amount of unemployment benefits you collected and what amount, if any, was withheld from your benefits for tax purposes.

If you received Unemployment Insurance, Pandemic Unemployment Assistance, Pandemic Emergency Unemployment Compensation or Extended Benefits, you may have chosen to withhold 10% of your benefits for tax purposes. That option was not available for the supplemental $600 Federal Pandemic Unemployment Compensation (FPUC) or $300 FEMA Lost Wages Assistance payments. You are responsible for paying any required federal taxes on any unemployment compensation payments you received in 2020.

I had a feeling, so I'm glad I saved as much of the extra as I did.

I got my statement Friday. I took the total of unemployment benefits paid and divided it by the amount of federal tax withheld. It was 10%. I found online that 10% is the only percentage taken out for fed taxes (other than 0%). So it appears the fed tax WAS taken out of the $600/week extra I received.

The notice you received about fed tax not taken out of the $600/week extra doesn’t seem to apply for IL.

[happystuff]

I got my statement Friday. I took the total of unemployment benefits paid and divided it by the amount of federal tax withheld. It was 10%. I found online that 10% is the only percentage taken out for fed taxes (other than 0%). So it appears the fed tax WAS taken out of the $600/week extra I received.

The notice you received about fed tax not taken out of the $600/week extra doesn’t seem to apply for IL.

Nice! Glad it was for you!

[Tradd]

Just heard that the new stimulus plan will waive taxes on unemployment for the first $10K or so. For those who’ve already field, don’t file amended returns. IRS will find a way to get it back to us. There’s a gal by the name of Terry Savage who is on WGN radio here in Chicago very often. She will be writing up a ton of stuff on the new stimulus plan later today on her website.

Terrysavage.com