Most people don’t realize that they can and often do, owe back taxes on unemployment payments. If you find yourself in this position, it can be a very scary situation, but fortunately, there’s plenty of help available for those who want to dig themselves out of the hole. You just need to work with a trusted team to make sure that your taxes are on the level from here on out.
CAN YOU OWE BACK TAXES ON UNEMPLOYMENT PAYMENTS?
Yes, you can owe taxes on unemployment payments because unemployment is taxable income. Any money that you receive is subject to federal or state tax, or both, depending on where you live. Too many people make the mistake of assuming that they don’t need to pay any money on their unemployment benefits, which can lead to massive fines, audits, or even charges if you are not careful.
The Mechanics of Unemployment Payments
Unemployment payments function a lot like regular income. The IRS and your local state receive information regarding how much you made in unemployment over the course of the year, and you need to claim it on your taxes just like you would do for anything else.
Tax Credits With Unemployment Payments
If you don’t claim your unemployment on your taxes, you might run into some trouble with tax credits. Certain people, especially lower-income people, qualify for tax credits if they’re making under a specific level of income, and those credits might go away if you have received unemployment benefits. The trouble is, you’re still on the hook to pay those credits back, which could cost you a lot of money in the future.
You might also be singled out by the IRS for an audit, which can be both stressful and costly. It’s better to get your taxes done right and in order as quickly as possible, especially if you owe taxes from a previous year.
State by State Exceptions
There are some states that don’t tax unemployment benefits, so if you live in Alabama, Virginia, Pennsylvania, California, Montana, or New Jersey, you won’t have to pay. You will still be on the hook for federal taxes, though, so be sure to hire a tax professional who is well versed in your state law and can ensure that you are filing your taxes to the letter.
Some states don’t tax your income at all, although you still have to pay federal taxes. If you live in Wyoming, Texas, South Dakota, Alaska, Washington, Florida, or Nevada, you do not have to pay state taxes at all. You will still have to pay your federal taxes.
COVID-19 and Unemployment Benefits
2020 was a momentous year for many reasons, but the biggest one of them all was the global pandemic. When COVID-19 hit, many people lost their jobs and had to go on long-term unemployment benefits. Unfortunately, depending on the state that you live in, you could be on the hook for a lot of money in April. It’s more important than ever before to seek professional help when filing your taxes this year, especially if you were one of the many people who spent a sizable amount of time unemployed.
THE IMPORTANCE OF GETTING PROFESSIONAL HELP WITH TAXES
Professionals understand taxes inside and out and can help you not only get the money that you need and deserve but shield you from getting an audit. It’s so easy to miss dotting an “i” or crossing a “t” during tax time, and tax professionals can help you to sleep easier at night knowing that your taxes are done right.
PREVIOUS OWED TAXES CAN COST YOU
If you owe previous taxes, the IRS might already be looking at your file. The last thing most people want, or need, is to get audited. If you owe previous taxes from unemployment benefits or even regular income, you should talk to a tax professional and get back on track as soon as you can. Doing so will help you to avoid a lot of fines, fees, and even legal actions.
No Errors
Previously owed taxes are a red flag with the IRS, which is why it’s so important to make sure that you file them properly as quickly as possible. Tax professionals are skilled at doing your taxes completely above board so that you’re far less likely to get audited by the IRS. They can also tell you what the likelihood of an audit is and prepare you for whatever may lie ahead. Depending on how much you owe, you might even be hit with tax evasion, a felony offense that puts you in some serious hot water both legally and in your day-to-day life.
Some people think that by using online tax software, they can ensure that their taxes are done properly. Unfortunately, that’s not always the case. While online tax software is a great tool, it’s still open to user error. If you don’t know the intricacies of tax law, you’re always better off going with a professional.
Fewer Fines
If you have previously owed taxes from unemployment benefits, there’s a good chance that you’re incurring a lot of fines, even if you don’t know it right away. Tax professionals can help you to cut back on those fines and even work with the IRS to set up a payment plan to give back all of the money that you owe. In extreme cases, the IRS can even seize your passport if you owe lots of previous taxes. Those who owe the IRS $52,000 or more in previous taxes could be subject to passport suspension.
If this happens to you, you must go to tax court to clear your name; a huge expense that could cost you thousands of dollars in legal fees. It’s best to get your previously owned taxes right with a professional to avoid any additional problems or headaches.
Tax Forgiveness
In some cases, you might even be eligible for tax forgiveness. This is when the IRS either minimizes or eliminates a certain amount of your tax debt. Since so many people filed for unemployment in 2020, it’s likely that a large amount of tax debt will be completely forgiven by the time the year is out. If you are under financial stress or are unable to pay back your taxes, you might be eligible for such a plan.
Otherwise, the IRS can set up a payment schedule with you that will allow you to comfortably pay off all of your old taxes. These plans are usually very reasonable and flexible. A tax professional can help you to run interference with the IRS and establish a plan that works within your budget and comfort level. Payment plans are very common and will keep you in the IRS’ good graces, helping you to avoid any additional penalties or fees that you might otherwise have.
If you owe back taxes on unemployment benefits or any other kind of revenue, we can help. A former IRS employee founded our company, and we’re uniquely positioned to be able to help you get right with the IRS. If you need to get your taxes in order, contact Geaux Tax Resolution to get started today!
