Thanks to coronavirus causing the economy to hit the wall, there are a lot of you who will have become unemployed who may never have in their lives to date. This article looks at what you might be able to receive and how it all will affect your tax return.
Economic Impact Payment (EIP)
All taxpayers who earn up to $99,000 Adjusted Gross Income (AGI) as individuals and $136,000 AGI as heads of households are entitled to up to a one-off payment of $1,200 in the Economic Impact Payment. Families with children are eligible for another $500 per child, meaning that a family of two adults and two children could receive up to $3,400 from the IRS.
This is classified as a ‘tax credit’ and is not taxable. The IRS will in most cases pay it directly into your bank account for your 2019 tax year.
Always file your tax return
If you have been made unemployed you should still file your tax return. There is an incentive to do this as you may fall into a lower tax band and therefore qualify for a tax refund on payments made in the last 12 months or so. Every cent counts in these situations!
Do you have tax debt?
Could you qualify for an offer in compromise? If your income has fallen off a cliff due to the coronavirus crisis and there’s no way at all of paying your tax bill you could qualify for a significant reduction in the final payment. Get in contact with us at Defense Tax if you’re in this situation and we will help you negotiate with the IRS.
The IRS has not stated whether it will fail to make the EIP to people who are late in paying their taxes. It has been known to claw back taxes in similar ways in the past! If you know you owe back taxes to the IRS or state tax boards then it may pay in the short term to get in contact with us at Defense Tax to resolve your tax debt problems.
Tax authorities consider a repayment plan that is being honored to be an account in good standing so you should have no problems with them.
Are you eligible for unemployment benefits?
As long as you weren’t fired for gross misconduct or quit your job voluntarily you probably qualify for unemployment benefit. That could be a valuable lifeline.
Thanks to the coronavirus economic stimulus package, you can also apply for the unemployment benefit if you are self-employed. That differs from life before coronavirus and offers a valuable lifeline to those who may have been left to fend for themselves in other situations.
Unemployment benefit + $600 a week
Part of the economic stimulus package was to add $600 a week to all state unemployment benefits. State unemployment benefits differ state to state but everyone applying will automatically receive the state income as well as an extra $600 a week thanks to the federal government.
In California, the state unemployment benefit is $450 a week. That means that as of now you will automatically receive $1,050 a week. Alabama only offers $275 a week so you will get $875 a week.
Unemployment benefit is taxable
The next thing to remember is that state unemployment benefits are taxable. The state notifies the IRS that you are receiving it so failing to declare your income will result in you end up on the IRS audit list, and that could mean lots of trouble down the line as an IRS investigating agent asks you detailed questions.
All states offer you the choice of automatically withholding 10% of your check for the IRS or you paying it yourself. It makes sense to allow the withholding.
Severance pay is taxable too… Final thoughts
Where the employer has offered a severance pay package as part of your losing your job, you need to remember that this is taxable too, and should also go in your tax return.
Given the uncertainties of the crisis, the last thing you will want to do is hand over money to the government! Sadly, even while it has offered quite generous allowances and payments to those who have been hardest hit by the crisis, you still have to play by its rules and pay back what little bits you owe. If you don’t there’s always the risk that you could be found out by the authorities and end up in all sorts of trouble. Isn’t it better just to play by the rules?