There have been multiple new laws passed to provide financial relief for businesses and individuals that have been affected by the pandemic this year. However, this necessary financial assistance may have come with a few strings attached too. Below are 3 possible tax surprises.
- Unemployment benefits. If you received a $1200 relief payment, this will not have to be reported as income. However, currently, there is no such law for unemployment benefits. If you’ve never applied for unemployment benefits you may not know that your benefits are taxable. You will owe federal tax and many states also impose a tax on your benefits. To reduce the likelihood of a surprise, check with your state unemployment office to find out if a portion of your benefits can be withheld for taxes.
- Estimated tax payments. Normally if you receive a paycheck from an employer, your taxes are withheld and sent to the IRS by your employer. However, depending on your income, those collecting unemployment benefits may be required to pay estimated tax on benefits received during the first 6 months of 2020, which will be due by July 15, 2020.
- Emergency distributions from retirement accounts. In 2020, to help cover pandemic-related emergency expenses you may withdraw up to $100,000 from various retirement accounts without penalties for early withdrawals. However, when filing your 2020 tax return, the withdrawal amount will be subject to income tax. To avoid the tax shock, ask for a tax review before taking money out of your retirement account. The tax review will give you an idea of how much you should reserve to pay the taxes owed.