Unemployment benefits caused a great deal of confusion this tax season. Fortunately, the unemployment tax nightmare that left many with reduced refunds or an unexpected tax bill is coming to an end.
The IRS announced that it will start issuing refunds in May to eligible taxpayers who paid more unemployment taxes than required for benefits received in 2020. But if you're still a bit muddled about how unemployment compensation affects your tax return, we've put together the latest updates to ensure you're on the right track.
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Taxes on unemployment benefits
Unemployment benefits have been a hot topic this tax season. In 2020, millions of Americans suffered from job loss and were forced to apply for unemployment benefits to stay afloat during the pandemic. Unbeknownst to many, the additional income received from unemployment came with a cost.
The tax laws state that unemployment compensation is typically taxable and must be included in gross income for the year. You can request taxes be withheld from your unemployment payments when you apply for benefits. For those who didn't elect to have taxes withheld, then they'd have to pay any tax in quarterly estimates or with their returns.