With the pandemic, it is not uncommon to see people using the unemployment system. When it comes to taxes and unemployment some may be confused how to handle them. The good news is that the IRS treats unemployment just like a normal paycheck when it comes to income taxes, under normal circumstances at least. Because of the pandemic, the federal government and the IRS have been tweaking rules to accommodate the population. There are some new rules to follow for income taxes during the 2021 tax year.
Unemployment Income Rules for 2021 Tax Year
For the 2020 tax year, the American Rescue Plan Act (ARPA) gave a tax break up to $10,200 in unemployment benefits for the tax year. To qualify you had to have a total gross income of less than $150,000. You claimed the exclusion on your 2020 tax return. The new rule for 2021 is that ARPA exemption does not apply to the 2021 tax year. You would then file like normal.
How Unemployment Taxes Work
There is a specific form, such as a W-2, called a 1099-G. You should receive this from our state or payor of unemployment benefits in early 2022. Your full unemployment benefit should appear in box 1 of the form. You do not have to include the form when you file your return since the IRS is also given a copy. You must report all unemployment benefits earned for the year on your tax return. Some states do not mail physical copies of your 1099-G. If you have not received one, you may need to go to your states’ website and see if they have it digitally.
What if I Can’t Pay the Taxes I Owe?
If you are receiving unemployment benefits, there is a chance you are facing hardships. There is a chance of receiving a lump sum of taxes due on your return. This could put you in the awkward state of having to choose between rent and your tax payments.
The IRS does allow you to apply for short-term or long-term installments to pay your tax debt. You would then have up to 72 months to pay off what is due to the IRS. All you must do is file a Form 9465 with the IRS.
Conclusion
For the 2021 tax year, you just need to file your unemployment benefits like you normally would. It is a good idea to make sure you set aside enough money to pay the taxes. If you are having a hard time filing your taxes, we are here to help you. At Allegiance Tax Advisors, we make taxes easy. We break down the process and make sure get pay only what you need too.