Do you need to pay any tax on stimulus checks, unemployment benefits?

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The majority of stimulus checks promised by the CARES Act have already been sent out. Moreover, those who filed for unemployment benefits have been getting extra funds as well, thanks to a $600 weekly boost under the CARES Act. Did it ever cross your mind whether or not you will be liable to pay any tax on the money you are getting (up to $2,400) in the form of coronavirus stimulus checks and on the unemployment benefits?

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No tax on coronavirus stimulus checks

If you are worried that you will have to share some part of your stimulus check with the tax department, then you will be glad to know that the stimulus checks are tax free. The same, however, can’t be said about the unemployment benefits.

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Let’s understand the tax treatment of both of the items in detail, starting with the coronavirus stimulus checks.

According to the IRS (Internal Revenue Service), it has already sent out about 130 million stimulus payments, and more will be sent this week. Based on the provisions under the CARES Act, those earning up to $99,000 a year get up to $1200. Married couples with a combined salary of up to $198,000 qualify for up to $2,400.

Whatever money you get under the CARES Act is all yours, and it won’t affect any taxes or refunds you might owe. Moreover, you will not be asked to refund any money back if after the stimulus payment your income crosses the threshold in 2020.

Similarly, if you don’t qualify for the payment based on your last year’s earnings, but you eventually made below the threshold this year, then you will receive the stimulus payment when you file your tax return for the current year.

Another benefit of the stimulus checks is that they won’t count as income for government assistance programs. Such programs include Medicaid and food stamps. However, if you do not spend the amount for more than twelve months, then it would be considered a part of your assets.

Unemployment benefits are taxable

Over 33 million workers have filed for unemployment benefits since mid-March. To help such workers, the CARES Act allotted $600/week through the end of July in addition to the state unemployment benefits. Also, the act expanded the coverage to include self-employed, independent contractors, gig workers and freelancers.

Talking about the tax treatment, all the unemployment benefits you get, both from federal and state, will be subject to federal income tax, as well as the state and local income taxes (wherever applicable). However, you don’t have to pay Social Security and Medicare taxes on the unemployment benefits.

You have the option to pay taxes quarterly (estimated), or withheld taxes. Financial experts recommend paying "withheld taxes" so that you don’t face a bigger tax bill later. However, the option you choose depends on your financial condition. If you can afford to pay taxes now, you should pay, or you can pay them later if you expect to get a job with a regular income.

Talking of other implications of unemployment benefits, the CARES Act says the $600/week payment won’t disqualify anyone from Medicaid or the Children's Health Insurance Program. However, it may make you ineligible for the Supplemental Nutrition Assistance Program (food stamps).

Also, the unemployment benefits you get are regarded as part of the income for the Affordable Care Act's federal subsidies. Such subsidies help those with lower and moderate income to pay premiums and out-of-pocket costs.

How to pay tax on unemployment benefits?

As said above, you have two options to pay taxes on unemployment benefits – pay estimated taxes quarterly, or withheld taxes. If you want the state government to withhold part of your benefit to be used toward federal and state income taxes, then you will have to fill out Form W-4V (Voluntary Withholding Request) with the IRS.

The form instructs the state government to withhold 10% from each payment for federal income taxes, and some part for the state taxes, if applicable.

The IRS has launched a new withholding calculator that helps users calculate the right amount to be withheld from their paycheck.

“Checking your withholding can help protect against having too little tax withheld and facing an unexpected tax bill or penalty at tax time next year,” the IRS says.

If you choose to pay estimated taxes quarterly, then you need to calculate your tax obligations and also meet the tax payment deadline every quarter. Missing the deadline or underpaying could result in a penalty charge.

Irrespective of how you pay the tax on unemployment benefits – withholding or pay quarterly – you will get Form 1099-G (Certain Government Payments) sometime early next year. This form will include details of the unemployment benefits you received in 2020. You can use this form to file your tax return.

A point to note is that if the unemployment benefits you get are not from the state or federal government, then they might not be fully taxable. For instance, any benefit received by unemployed workers, who voluntarily contributed to a non-union unemployment fund, will only be taxed if the benefit exceeds the contribution made.