Don’t be surprised at tax time: unemployment benefits have tax implications

December 21, 2020 : Kathy Pickering

A record number of Americans are relying on unemployment benefits this year as COVID-19 cases climb. Millions of first-time unemployed individuals may not understand the tax implications from receiving unemployment benefits and what they can mean to their tax refunds. Reaching out to an H&R Block tax professional or utilizing H&R Block’s online income tax calculator can help make better sense of how unemployment benefits may impact your expected tax refund.

Avoid a tax-time surprise with a little planning

For anyone who received unemployment benefits, it’s important to know they are generally considered taxable income. Those receiving enhanced unemployment compensation are getting a much-needed financial boost this year, but they could be unknowingly caught up in one of these snags:

  • Didn’t know taxes can be withheld when they signed up for benefits.
  • Opted not to withhold a portion for federal income taxes to maximize their unemployment check.

Either action may lead to a larger tax liability, resulting in a surprise tax bill or a significantly reduced refund. Recipients can minimize both of these unpleasant surprises and regain financial confidence with a few easy-to-follow steps:

  1. Recognize your current financial situation: Evaluate income from earlier in the year and any taxes withheld. This knowledge can help you understand if you can expect a smaller tax-time refund or make a plan to address your balance so you can set aside money now.
  • Select the right tools or collaborate with a tax professional: Now is a good time to set up for your desired outcome. Determining how much withholding you need or how much to save can feel confusing – especially if you received unemployment benefits this year. Reach out to your trusted H&R Block tax professional for personalized guidance or consider using an online tool like H&R Block’s W-4 paycheck tax calculator or the IRS’ withholding estimator.

We have more control over our desired outcomes than we often think and a little planning now with the right tax professional can have big benefits for your financial confidence.

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Kathy Pickering

Chief Tax Officer

Kathy is the chief tax officer at H&R Block. With more than a decade of experience in tax operations and 25 years in information technology, Pickering is responsible for the strategic direction and management for a team of the nation's top experts on tax issues. Prior to joining H&R Block, Pickering worked with Sprint PCS, Olsten Health Services and various consulting firms where she focused on implementing accounting and financial systems, and leading Enterprise Resource Planning (ERP) software implementations, such as JD Edwards and PeopleSoft software.

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