Is It Important to File A US Tax Return When Unemployed?

us tax return

Most individuals struggle with meeting minimal needs and walking by budget to save for budget. But when one is going through unemployment, managing finances becomes challenging. 

And under so much financial hassle, one finds it hard to pay off the taxes and manage online installment loans no credit check repayments and thus seek exemption.

According to the US tax laws, unemployment does not differ from an employed individual. And thus, up to an extent, an individual has to pay taxes. It is clear in the recent amendment that the US made in 2020 in response to the pandemic.

And now, according to the rule, “unemployed individuals on benefits should expect to pay the complete tax on them”. And according to IRS, the rule is bound to be followed without going through any further amendment.

According to federal law, individuals in the United States are taxed regardless of their employment status. However, if you live in a state without paying income tax, there is no need to be cautious on the tax payments. The treatment for unemployment varies from state to state in the US.

What Are Unemployment Benefits? 

An unemployed individual in the US receives unemployment benefits. Each state calculates unemployment compensation by taking a percentage of the worker’s average pay over a recent 52-week period.

us tax return

These benefits are hosted by the state government and are funded by the state and federal governments. However, the benefits for unemployment differ by period. The unemployed individuals could receive benefits for 12 weeks or work for 30 weeks. These extensions are possible in acute cases of unemployment.

Employers pay unemployment taxes, and these funds are deposited into the accounts of workers who do not have regular jobs. The entire process is monitored by the US Department of Labor (DOL).

Who is eligible for the Unemployment Benefits in the US?

The US Department of Labour’s Unemployment Program provides unemployment benefits to unemployed individuals that align with the below criteria:

  • Unemployed people with no official fault
  • Made enough money during the base period
  • Completely or partially unemployed
  • Physically capable of working
  • Ready and willing to grab a work opportunity as soon as it strikes

The unemployment weekly benefit amount is anywhere from $40- $450

Different individuals qualify for different unemployment benefits account. Once you qualify for the unemployed benefits, you need to certify for unemployed benefits every two weeks to continue receiving payments. 

The certification process involves answering basic questions regarding the employment every two weeks to prove the authority of your unemployment status every time and eligibility for securing the benefits for the unemployed.

How Does Unemployment Status Affect Taxes in the US?

However, as mentioned above, unemployment benefits are taxable. And because of this, most states do not share the idea of withholding taxes. You can request the authorities to withhold the taxes. It lies within your authority to do so. Under federal law, you can withhold up to 10% of the taxes.

You can request withholding of taxes by:

  1. Filing a W-4V form and submitting it to the state unemployment office
  2. Pay the estimated taxes. The payments can be made quarterly, allowing you to channel your tax obligation into another channel. You may face a large tax bill and an underpayment penalty if you cannot do so.
  3. Form W-4V is filled to request the authority to withhold the federal income taxes from your total income. If you request to withhold a small amount, you owe tax, but you might face difficulty if you withhold too much amount.

Earlier, a W-4V form was used to address Personal Allowance to claim the number of allowances. Still, in 2022, the form asks you to record the number of dependents in the house and how your circumstances warrant a large and small amount. It asks for the additional income source or itemizes on the tax return.

Thus, check whether the authorities readily agree to withhold your taxes until you file for a tax return if you are receiving unemployment benefits. It is important for individuals to be transparent about the earnings and benefits they receive while filing tax returns.

Apart from this, be mindful of the fact that unemployment compensation is not subjected to “earned” income for Earned Income Tax Credit (EITC), childcare credit, and other child credit calculations. It can minimize the amount you receive as unemployment benefits.

When Does an Unemployed Individual in The US Not Have to Pay Tax?

“The American Rescue Plan Act (ARPA)” confirmed the tax break of up to $10,000 on unemployed benefits collected in 2020, according to the unemployment rules for the tax year 2021. 

To qualify for the tax exemption with a changed, adjusted gross income of less than $150,000. This limit includes other benefits and income sources.

Thus, every unemployed individual needs to file a federal status by subtracting the standard deduction from income and, thus, individuals are only taxed on the remaining part. In opposition to this, if the income is more than the deductions, the individual has to pay tax. In addition, if your income is more than the standard deduction and if you are above 65 years of age, you are exempt from the tax. There are exceptions to it as well.

Here are the criteria for unemployed people with benefits to filing the tax amount:

Filing StatusTax Year 2021Tax Year 2022
Married and filing together$25,100$25,900
Married and filing separately$12,550$12,950
Head of Household$18,800$19,400

Under this, single individuals and married and separate individuals have to file similar taxes in the year 2022. The data clarifies everything if you are unclear whether you should file the tax as a single individual on benefits. According to IRS, married individuals earning $5 together will have to file for taxes regardless of the file it together or separately.

How do The Taxes on Unemployment Benefits Work?

Once an individual receives unemployment benefits, he/she would have to file Form-1099-G from your state in 2022 for the income she received from benefits in the year 2021. Enter the complete details of the amount received in box 1.

The IRS must also receive a copy of the same. While preparing to file the return for 2021, mention the amount listed in box 1 of the Form 1099 on line 7 of Schedule 1, change to income, and additional income. Therefore, an individual needs to fill up Schedule 1 with Form 1040 or 1040 SR return. Line 7 is known as unemployed compensation. Write it on Schedule 1 and line 8 of your tax return in the Additional income section.

Reporting unemployment benefits on tax returns is critical to continue receiving one until you get secured employment. You can check out your state’s laws and procedures for filing for unemployment benefits on the state’s website and file for the same.

Is it possible to be disqualified from receiving unemployment benefits? 

Each state has its laws regarding unemployment benefits in the US. And, to qualify for unemployment benefits, people must be unemployed without their own fault. So, if you were fired, quit, or ended from the job and are on bad credit personal loans guaranteed approval no credit check, you get disqualified from receiving the benefits.

Bottom Line

Thus, as an unemployed individual, file income taxes, regardless of whether you are partially unemployed or on benefits. Income will be taxed according to the total amount you earned in the calendar year. For relief, you can fill up a W4-V form to withhold taxes for a while or pay them quarterly to avoid a late penalty.