Confused about the new unemployment tax break? We answer your questions
Here’s the easy part: If your modified adjusted gross income is less than $150,000, you don’t have to pay federal income tax on the first $10,200 in unemployment benefits you got last year.
And if you live in California, regardless of income, you don’t have to pay state tax on any of those benefits.
But like anything else involving taxes, there are difficult parts to all this.
What if both you and your spouse got unemployment payments? What sort of tax do you have to pay if your income goes above the limit? And how do you explain all this to the government on the tax form?
With the help of Perry Ghilarducci, a certified public accountant in Sacramento, the California Employment Development Department media staff and the Internal Revenue Service, we try to answer some of the questions readers have posed to us.
Here goes:
Q. How do I know how much I received in unemployment compensation last year?
A. You should have received a 1099G form from the state. If you have questions about the form, use this link and call the numbers or the contact information on the EDD site.
Q. Do I have to pay California state income tax on any of the unemployment compensation?
A. No. Even if the benefits come from federal funds, such as Pandemic Unemployment Assistance or Pandemic Emergency Unemployment Compensation, you pay no state income tax on unemployment compensation.
Q. Do I have to pay federal income tax on those benefits?
A. Yes, though you can exclude the first $10,200 of benefits if your modified adjusted gross income last year was less than $150,000.
Q. How do I know if I can exclude that amount?
A. The IRS has a worksheet to help you calculate the benefit, but be warned: It’s complicated. You may need to consult a tax professional.
Q. Both me and my spouse received unemployment benefits last year.. Can we both claim the tax break?
A. Yes. If you both received $10,200, for instance, and qualify for the break, you can subtract $20,400 from your taxable income, assuming your modified adjusted gross income is less than $150,000.
Q. If I earn more than $150,000, how much tax do I pay on the unemployment benefit?
A. You are taxed at the regular rate that applies to your ordinary income if your modified adjusted gross income is over $150,000 by even $1.
Q. Did the state withhold any of my unemployment money for taxes?
A. “We withheld tax per request in 2020,” said the EDD media office.
Q. Will it withhold from all benefits?
A. EDD did not withhold tax from some payments. For instance, withholding was not available for the $600 Pandemic Additional Compensation payments that were authorized in late December, since they had to be implemented quickly at the time.
Q. I filed my 2020 tax return before the $10,200 benefit was created. What do I do?
A. Nothing. The IRS announced this week it will “take steps to automatically refund money this spring and summer to people who filed their tax return reporting unemployment compensation before the recent changes made by the American Rescue Plan.”
Q. Could I wind up with a refund?
A. Possibly. The IRS said it will “take steps in the spring and summer to make the appropriate change to their return, which may result in a refund.” First refunds are expected in May and probably continue during the summer.
IRS advises that for those who already filed returns, it will figure the proper amount of unemployment compensation and tax.
The recalculations will occur in two phases. First up will be people eligible for the up to $10,200 break. Next will be married filing joint filers who are eligible for the up to $20,400 exclusion and people with “more complex” returns.
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